By Regan Ervin and Stephanie Klein
It might sound like overkill to some, but saving for retirement in your twenties can make a big difference in your future lifestyle during retirement. Or your thirties. So even if the contributions are small—it’s worth it.
Start with the goal of a stable and diversified portfolio (diverse means having investments across asset classes AND having a good range within each asset class). Then, don’t touch that money.
The most significant example of diversifying your investments across asset classes is to choose low-cost, broad market ETFs. Since you’re young, you won’t need to draw from these for a long time—and you shouldn’t.
In other words, be a long-term investor! Accept what the broad market is doing and don’t interfere. One exception: tax-loss harvesting and rebalancing are not interfering. The truth is, most professional investors underperform the broad markets by interfering under the notion they are adding value.
An essential step to long-term investing is having appropriate savings safeguards in place for emergencies.
Besides utilizing smart investing practices, it pays to utilize the full capacity of your employee benefit package. Be diligent in optimizing those opportunities: fund your company retirement plan, maximize your Roth contributions, be tax-efficient with which accounts you use. Generally, bonds are tax-inefficient and should be in retirement accounts, but equities are generally more tax efficient and best held in non-retirement accounts.
Outside of these standard offerings, it’s important to not participate in an investing strategy just because people you know are doing it. Many popular solutions are expensive, and often generate fewer returns than low-cost investments. A great illustration of this phenomenon: Warren Buffet once made a million-dollar bet with a hedge fund that he'd make more money over ten years by putting his money in a low-cost index fund than he would with the high-cost hedge fund. Ten years later, he won.
In your own quest to stay smart and profitable, stick to a few simple criteria to sort your options. If you use an advisor, hire a fee-based advisor who has a 100% fiduciary duty to you. Know how they are being compensated. Don’t use them if they get commissions on the products they’re selling. Avoid, avoid, avoid annuities, insurance-related investment products, and commission-driven investments.
Once your plan is in place, automate your investment contributions with monthly transfers from bank accounts. Pretend you don’t have that money and look at your spending options as if your paycheck was the amount after your contributions. Don't forget—you could be accomplishing as much as doubling your retirement savings by starting now.
Reach out to us with your biggest questions and we'll do our best to answer them.
Schedule CallWhole Life Insurance
A high-cost option for permanent life insurance that includes a death benefit and an additional saved amount to the covered person or their beneficiary at a guaranteed rate of growth.
Universal Life Insurance
A type of permanent life insurance. As permanent life insurance, it includes cash benefits to the covered person, but the amount of the benefit to the policyholder relies on market performance. The death beneficiary receives a set amount.
Permanent Life Insurance
A category of life insurance that doesn't expire. It also accrues cash value over time which the covered person may use at a later date.
Term Insurance
A type of life insurance that covers a person for a set period of time.
Annuity
An annuity is an insurance product that's used as an income stream for retirees.
Registered Investment Advisor
A registered investment advisor (or RIA) isn't a term for a professional—it's actually a term for a firm operating under fiduciary requirements. Employees of an RIA firm are called Registered Investment Advisor Representatives.
Investment Advisor
An investment advisor gives advice on investment decisions. There are different licenses advisors can hold, and some hold multiple licenses at once. The obligation advisors have towards clients varies by license.
Tax Loss Harvesting
Tax loss harvesting is a practice advisors and investors often employ to avoid excessive taxes on money made quickly in the stock market.
Initial Public Offering
An initial public offering (also called an IPO) is a transition a company makes when it becomes publicly owned via the stock market.
Ticker Symbol
A ticker symbol is a few letters and/or numbers that symbolize an individual stock. They can be abbreviations or acronyms, but are also sometimes randomly selected.
Compound Interest
"Interest on interest" — the money you make from interest makes your saved amount bigger over time, which means you'll make an even larger sum from interest the next year. Each year the growth of "interest on interest" spikes higher.
Diversification
Diversification refers to keeping your assets balanced, both across asset classes and within asset classes. A diverse portfolio means less risk.
Alternative Asset Class
Alternative asset classes are any asset class outside the four major classes (stocks, bonds, real estate, and cash).
Security and Exchange Commission
The SEC is the government organization that regulates the investing industry.
Fiduciary
A fiduciary is also an investment manager or investment advisor (RIA for short), but not all managers/advisors are fiduciaries. The term fiduciary communicates the advisor's formal obligations. A fiduciary is required to act only in the client's best interests.
Investment Manager
An investment manager is someone who is licensed to manage clients assets and advise them how to invest their capital.
Stock
A stock (also known as a security) is a type of asset. Stocks are bought and sold on the public stock exchange.
Return
A return is the amount of money you make from investing a particular asset or set of assets.
Risk
Investment risk is equivalent to how likely it is to achieve the outcome (or returns) that you're hoping for.
Asset Class
An asset class is a category of assets, such as stocks. There are four major asset classes and many more alternative asset classes.
Asset
Something that you purchase which you expect to have greater value in the future. Your investment portfolio is made up of individual assets.
Investing
Investing is the act of putting your time, effort or capital at risk, expecting that you'll get something of greater value in return.
