Ultimate Guide to RetirementFrom the Editors of M oney M agazine (2011, J une 10). U l?mate G uide to R e?rement. M oney M agazine. R etrieved from h Cp:// money.cnn.com/re?rement/guide/Basics/When do I need to start inves/ng for re/rement?We get it: Re?rement is just about the last thing on your mind when youre in your 20s. However, star?ng to invest for re?rement as soon as you ﬁnish school and begin earning income is a brilliant ﬁnancial move. T he reason is a magical liCle thing called compounding. I ts what happens when your interest keeps earning interest, year aSer year.If you start early, the eﬀects of compounding can be huge. F or example, suppose you start seVng aside $1,000 a year (about $19 a week) when youre 25. Y ou put it in a re?rement account earning 8% a year. E ven if you stop inves?ng completely when you turn 35 -‐ that is, youve invested for only 10 years -‐ your total investment will have grown to nearly $169,000 by the ?me you turn 65 and are ready to re?re. T hats right: A $10,000 investment turns into $169,000.OK, heres where it gets really interes?ng. Lets say you do the same exact thing, but you dont start inves?ng the $1,000 a year un?l you turn 35. A nd you keep on inves?ng that much every single year un?l you turn 65. T hat is, you invest $1,000 a year for 30 years, rather than for 10 years as in the previous example. How much do you wind up with when youre 65? O nly about $125,000. T hats right: E ven though you invest three 1mes as much money, you wind up with less.The earlier you start inves?ng, the more you can beneﬁt from compounding. T hats why you need to get going as soon as possible.How much money do I need to invest for re/rement?That depends on a whole bunch of things, like when you start inves?ng, what you decide to invest in, and when you decide to re?re.But as a general rule, ﬁnancial planners advise that every year you should invest the maximum possible in any tax-‐advantaged re?rement plan that youre eligible for. A nd if youre geVng started with re?rement inves?ng on the late side, you may need to invest addi?onal money, over and beyond the money in such plans, into regular (taxable) investment accounts.For a beCer sense of how much youll need to invest, go to our re?rement planner calculator.Where should I put my re/rement money?When you invest for re?rement, you typically have three main op?ons:1. You can put the money into a re?rement account thats oﬀered by your employer, such as a 401(k) or 403(b) plan. These plans are great deals because the money will grow tax-‐free un?l you withdraw it in re?rement. Whats more, you escape taxes either on the money you put into the plan or the money you withdraw from the plan, depending on whether you choose a tradi?onal or Roth op?on. 2. You can put the money into a tax-‐advantaged re?rement account of your own, such as an I RA. I RAs oﬀer similar tax breaks to 401(k)s, though some of the eligibility rules diﬀer. 3. You can put the money into a regular investment account that doesnt have tax advantages.The ﬁrst two op?ons are far beCer deals, but there are limits on how much money you can put into them each year. I f youve put all the money youre allowed into tax-‐favored plans and you want to save even more for re?rement (for example, because you got a late start in saving and need to make up for lost ?me), youll have to use a regular investment account.What should I invest in?Good ques?on. A nd though zillions of books have been wriCen about this, the basics are hardly rocket science.
There are three main kinds of investments, or "asset classes": stocks, bonds and cash. Y our re?rement accounts should probably contain a mix of stocks and bonds -‐ and maybe cash too.You can invest in stocks and bonds in one of two ways: by buying them individually or by buying them via a mutual fund. A mutual fund is simply a collec?on of stocks, or bonds, or cash equivalents -‐ or some?mes a mix of all three.Some people also invest in "hard assets" like real estate or gold, but those arent always great choices for the average persons re?rement account.Stocks? Bonds? Whats the right mix?We know: Y ou want to pick a home-‐run stock, cash out at the top and -‐ bam! -‐ enjoy an instant re?rement.Unfortunately, it rarely works out that way. T he good news, however, is that smart re?rement inves?ng is actually much, much easier.The key is having the right mix of stocks, bonds and cash. T he mix of those three asset classes is known as your "asset alloca?on." Pick your asset alloca?on wisely, and it will do the work for you.Should my asset alloca/on change as I get older?Absolutely. T hats because diﬀerent investment mixes are riskier than others, and your tolerance for risk decreases as you age.Stocks -‐ which are shares of ownership in a corpora?on -‐ provide the most juice for long-‐term growth. But theyre vola?le, so they can lose you a lot of money in the short term. When youre young, the long-‐term growth poten?al of stocks outweighs the risks. When youre older, not so much. S o you should scale back on the percentage of stocks in your porkolio over ?me.Bonds -‐ which are basically interest-‐bearing loans that you provide a company or government -‐ give you weaker long-‐term returns than stocks do, but less vola?lity. S o you should increase the percentage of your holdings in bonds over ?me.Cash -‐ or "cash equivalents," such as money-‐market funds -‐ are the least risky of all. But they also have the lowest returns. Y ou might not need cash in your re?rement account at all un?l youre approaching re?rement age or in re?rement.Whats the best asset alloca/on for my age?The old rule of thumb used to be that you should subtract your age from 100 -‐ and thats the percentage of your porkolio that you should keep in stocks. F or example, if youre 30, you should keep 70% of your porkolio in stocks. I f youre 70, you should keep 30% of your porkolio in stocks.However, with A mericans living longer and longer, many ﬁnancial planners are now recommending that the rule should be closer to 110 or 120 minus your age. T hats because if you need to make your money last longer, youll need the extra growth that stocks can provide.To ﬁnd the right asset alloca?on for you, go to our asset alloca?on calculator.How much should I save if I want to re/re early?To step oﬀ the corporate treadmill in your 50s or early 60s and maintain anything close to your standard of living, you need a seriously big re?rement kiCy.How serious? Y oull likely need assets worth 10 to 16 ?mes your salary by the ?me you leave your job. A 45-‐year-‐old making $120,000 who hopes to re?re at age 60, say, should already have nearly $700,000 set aside. (See the Re?re E arly calculator.)You can get by with less if youll have other sources of income. I f that same 45-‐year-‐old has a typical old-‐fashioned check-‐a-‐month pension, for example, he might need only $432,000 in savings to be on track. I f you expect to hold down a scaled-‐back job for your ﬁrst decade of re?rement, you can also get by with less.S?ll, your target is a big number, and to reach it youll have to save diligently, invest aggressively, and keep taxes and expenses from eroding your returns.How oAen should I check on my re/rement investments?
Once a year is plenty. T hats when you should make sure your asset alloca?on s?ll makes sense for your age, and perhaps sell certain investments that have grown so big that your target alloca?on is out of whack. Reinvest the money in order to bring your asset alloca?on back where you want it.One nice beneﬁt of rebalancing like this is that it forces you to do what so many investors fail to do: Buy low and sell high.