Retirement isn't for old people, it's something that everyone should start planning for when they turn 18.
That statement seems, well, unfounded. I think this is because a lot of people don't plan for retirement until they are much older, so our generation doesn't get an opportunity to see how it should really be done. As of 2016, the average 50 year old only has $42,000 saved for retirement. In this Move, we are going to look at retirement planning, how it should be done, and at what levels.
You are going to get old. No doubt about it. One of the saddest things I hear is when people say, "Well my kids are just going to take care of me, I took care of them." Not really the best idea. If you are counting on your kids, solely, that may put an extreme amount of stress and pressure on them. Especially if they are trying to fund their retirement and help their kids with education. If those things get pushed to the back burner, then this whole cycle will repeat. See how bad it is?
A little bit of savings goes a long way. Let's take 22 year old Bobby and assume he makes $50,000 fresh out of college. Let's further assume that he's an average worker and never receives a raise for the rest of his life. If he retires at 62, in 40 years, how much money do you think he would have if he put 10% of his income away?
$1.4 Million Dollars
Again, that is assuming no company match, no profit sharing, and no raises. It also assumes an 8% annual growth which is 2% lower than the stock market average, think conservative. Also think about what it could be if all that other stuff was in place...it's pretty amazing how compound interest works.
I am not an investment expert. Let's get that out of the way. I invest, love watching the market, and try to learn more every day. I go off of best practices. I look at statistics and from that data, I've put together what I call The Buffett Principles. These are principles I learned from Warren Buffett, who is an accomplished investor and entrepreneur. This will be your guide to investing and feel free to build on it and even made modifications as you learn more. Someones people get grilled for just using index funds (mutual funds that track with the S&P 500, etc.). In Tony Robbin's book Money: Master the Game he reports that the indexes beat stock pickers 96% of the time. And the 4% that beat the funds, well, it's a different 4% every year.
With that PSA out of the way, let's look at The Buffett Principles:
- Invest in things you understand. This seems pretty commonsensical, but many people just toss their money into the market and hopes Facebook sets them up with a great retirement. While I like Facebook, I think it's important to understand what you're getting yourself into as well as the risks.
- Diversification is always a great idea. Back to our Facebook analogy, you don't just want to have all of your eggs in one basket. Mutual funds are a great idea, some people use annuities, though they classically have higher fees. Even single stocks are nice if they are a small part of your portfolio. But spreading out your investments is always a solid choice.
- Map your investments conservatively. Back to what I had written in the why section, I map all of my retirement out at 8%. Since inception, the market has done about 10.5% but after fees and well-placed conservatism, I landed on 8%. That way you are not overshooting the runway and if you it's higher, well, it's a bonus. Conservatism is Buffett's standard and the 8% figure is mine. We will call this one 50-50.
- Take advantage of employer benefits. Many companies utilize 401(k) organizations that offer investment advice and will walk you through each fund. Rather than just picking a fund that sounds cool, walk through it with someone. Look at the track record and see if it's close to that 8% figure. If it's a newer fund that looks promising, maybe put a small percentage in and see how it performs.
- Don't take unnecessary risks. It's important that you, again, understand what you are investing in and that you don't take stupid risks. Stupid risks is market-betting + ignorance. Calculated risks are great, just know what could be on the other side.
As a rule, if you don't have anything invested and you've reached Move #5, I recommend the following allocations as a starting point.
- 18-29, 10% of gross annual income
- 30-49, 15% of gross annual income
- 50+, 20% of gross annual income
Keep in mind that depending on the stage of life you are in, there is still your kids' college to consider as well as paying off your mortgage and the next Move, which is building an awesome emergency fund.
Once you have set up your allocations and have met with a trusted investment professional, you can check off Move #5 and press forward to Move #6.