Being debt free is a great indication that you are doing well with managing your finances, but it’s not the only benchmark for good financial health. You may be debt free, but are you saving for retirement? Are you stashing away enough money to retire comfortably and sustain a good lifestyle for 25 to 30 years? Investing can be a very controversial subject. Everyone seems to have their own opinion about long term investing. Stock brokers, financial advisors, and other financial professionals make a killing to do one thing, maximize your long term return on investment. Here’s my question, is investing really as complicated as some people make it sound? Can an auto mechanic figure out how to invest for his or her retirement?
My philosophy is that a 10 year old child can figure out how to invest wisely for retirement given a little research and guidance. I don’t claim to be an investment guru or expert. I know there are tons of people just in the blogosphere that know more than me about long term investing, but I also know that many people focus more on the numbers than they do the method and philosophy behind long term investing. There are basically two types of full-proof long term investing:
- Investing in the Stock Market (401k, Roth 401k, IRA, Roth IRA)
- Investing in Real Estate (rental property, second homes)
The easiest and most effective way to invest long term in the stock market is to set up a retirement account. I have always recommended that your 401k or 403b take precedence over an IRA if the 401k or 403b offers a company match. The company match is FREE money. You should NEVER pass up free money. The 401k and 403b money will be taxed when you withdraw it at retirement, but again, you CANNOT pass up free money. If you are self-employed or your company doesn’t offer a match, then definitely go with the SEP IRA for self-employed or the Roth IRA if you qualify. Basically, if you make less than $110,000 single or $150,000 married, you’ll qualify for the Roth IRA. The beauty of the Roth IRA is that it is after-tax contributions, but the withdrawals are not taxed. Many people think this is good, because you will generally be in a higher tax bracket at retirement than you are in the your 30s and 40s, assuming that you increasingly make more money as you grow older.
I am not a big proponent of buying single stocks for the long term. I think you should keep it simple and invest in mutual funds in a tax savings retirement account. If you put together a plan of contributing a monthly amount to a retirement account, you will finish your working career as a millionaire. If you are in your 30s and 40s and you need to catch up, I would start investing 15% of your take home pay assuming you are debt free other than the house. Once you’ve paid off everything but the house, then go for retirement saving. If you are in your 20s, then you can start out saving 5 to 10%, and if you are getting a company match, then you’re doing VERY well at an early age. I am 25 years old. I have saved $4,200 in my 401k so far. If I started saving $300 (which is basically a car payment) a month for the next 35 years averaging a 10% rate of return, I would end up with 1.2 million dollars at age 60. When my wife starts working and we increased our contributions to $750 a month, we would end up with $2.9 millions dollars at age 60. That’s not bad. If you kept that money invested while in retirement, you could live off of a $290,000 non-taxed yearly income. A $300k retirement sounds pretty good to me, even when you consider the cost of living 35 years from now.
Real estate investing is also another viable choice for long-term investing. However, it does require a little more work and skill to make it profitable and worth while. You have to deal with renters, maintenance, insurance, taxes, and many other costs that take away from your rate of return on real estate. Having said that, I know many people that bought an investment property 10 years ago in Florida, and their $100,000 has turned into $300,000 in 10 years. That’s not too shabby either! Again, the sweat equity involved sometimes makes it less appealing than parking your money in the stock market. However, it can also be fun to buy and sell property in different areas. If you enjoy real estate, fixing up houses, and negotiating deals, then real estate investing may be something you look into for retirement income.
The bottom line is that you don’t need to spread your money out into 10 different investment vehicles. I would NEVER rely on a life insurance policy to make you good retirement income. The fees are incredibly high and the return on investment tends to be rates similar to a CD or money market account. Gold bullion has a horrible long-term track record. It averages somewhere around 4% to 6% per year. Your money can do much better than that. Stick with the stock market which has proven itself to average 12% for the past 85 years and real estate that continues to go up in value over the long run.