How To Start Investing And Planning For Retirement
Don’t have time to read the entire post now? Watch this video with the summary.
In my money journey, I have been through various stages. At the beginning the goal was to curb my expenses, build my emergency fund, and payoff my ‘bad’ debts.
Once that was completed and I earned more money without increasing expenses, I started researching investments both in and out of retirement accounts.
There was one tiny problem with that plan. I had no clue where to start and I found the topic boring. I started with two basic questions: did I know what my employer’s matching contribution to my retirement plan was? Was I taking advantage of it? The answer to both questions back then was ‘no’.
I had my first two actions to execute. First, I found out that my employer’s match to my retirement contribution was up to 6%. What does this mean exactly? It means that if I contribute nothing to my retirement, my employer does the same and contributes nothing to it.
If I choose to put in 2% of my salary into my retirement account, my employer will put 2% of my salary as well. And so on, until 6% – i.e., if I contribute 10% of my salary into my retirement account, my employer will contribute 6% (their maximum contribution) of my salary into my retirement.
Second action step was to go to the HR system and increase my contribution to my retirement account to 6% of my salary. As I earned more money and did not go into debt, I gradually increased my contributions until I reached the maximum allowed by the IRS.
A quick overview of retirement plans
There are several retirement plans in the US depending on what type of company you work for. Many publicly traded or private companies will have a 401K. Government and non for profits usually have a 403b or 401(a). If you work independently, you could open an Individual Retirement Account (IRA).
Plans through your employer operate in a similar fashion: every paycheck you decide what percentage of your salary you will contribute (there is a maximum annual contribution limit set by the IRS). Your employer, in many cases, matches that contribution up to a certain percentage. The money you and your employer contribute goes into several funds with bonds, stocks, mutual funds, etc. and it will grow in time.
Once you meet the criteria for retirement, you can use that money without paying penalties. But depending on the type of plan and contributions, you may pay taxes.
For most of the retirement plans you can contribute money pre or post tax. What does this mean? In both scenarios you will pay taxes; the difference is if you will pay them now or in retirement.
When we contribute money before tax, that amount is removed from our paycheck before the taxes are calculated. In most cases the net income from the paycheck is higher. For example, if your paycheck is $1,000 gross and you are contributing $200 to your retirement account, the taxes will be calculated on the remaining $800. Considering a 10% tax rate, your net income would be $720. When you meet the criteria for retirement, you will pay taxes on the money you are earning from the retirement plan.
When we contribute money after tax, on the other hand, the taxes are calculated before the retirement contribution is subtracted. In most cases the net income from the paycheck is lower. In our example, the taxes will be calculated over the $1,000 in your paycheck, and the $200 will be taken from the after-tax amount. Your net income would be $700 ($1,000 – $100 tax – $200 retirement contribution). When you meet the criteria for retirement, you will not pay taxes on the money you are earning from the retirement plan.
“The biggest risk of all is not taking one.” Mellody Hobson, American businesswoman
Once I took care of the retirement plan, it was time to learn the basics of investing in stocks, exchange trading funds (ETFs) and mutual funds.
Of course, I had heard of ‘the market’ or ‘the exchange’… even took my picture with the bull at Wall Street. I also knew that it was not a market in the traditional sense of the word. It’s not like I could not show up and tell someone ‘Please, give me $100 of TGT’.
I learned there are financial institutions where I could create an investment account, transfer money into them and then buy stocks, mutual funds, etc. Some examples are Vanguard, Acorns, TD Ameritrade, etc.
Guess what my next step was? You got it! I opened an account in one of these firms, connected it to my checking account and made my first transfer.
Now the question was, which stock should I buy? When do I sell it? I do not have the stomach or the patience to be looking at the market ticker from opening to closing bell around the world.
One of the best tips I read to choose which stocks to acquire was to think about the companies where I bought products and services. Another important consideration is to know how they make money. For example, I go to Target frequently, I understand how they make money (they sell stuff for a profit). So, I have Target stocks.
I noticed that once I start to understand the basic mechanics of whatever I am learning, my interest is piqued, and I find myself curious about other aspects. So, I started to learn about mutual funds and real estate investment trusts. I now have different kinds of investments outside of my retirement accounts on instruments I have at least some understanding.
“Happiness is not in the mere possession of money; it lies in the joy of achievement, in the thrill of creative effort.” Franklin D. Roosevelt
To recap, when it comes to retirement accounts the two most important things to do are
a) find out the maximum percentage your employer will match your contribution, and
b) contribute at least that percentage your employer matches – otherwise, you are leaving free money on the table.
Then, decide if you will pay the taxes now or if you will pay them once in retirement.
When it comes to investing on your own, consider starting with stocks or mutual funds of companies you know and understand. Is it clear how the company makes money? If the answer is ‘no’ you may need to analyze further.
What actions will you take next for your retirement and/or investment goals? Please, let us know in the comments.
As a leadership coach, I enable talent to achieve bold goals with high standards. My mission is to help underrepresented women in the financial industry transition from mid to senior level leadership positions by creating awareness, increasing emotional intelligence, and unveiling the tools and choices available to them.