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investing for retirement: just tell me what to do!


Some people love to dive into new subjects; they take a hankering to learn about, say, computers, and the next thing you know they’re telling you stories of DEC and Xerox with stars in their eyes.

Some people, however, can’t be bothered. They want to know what a decent course of action is, and all they care about is that the advice comes from someone they trust. They don’t want to know the whys and wherefores; they just want something that works. They’re busy folk, and they have better things to do.

This post is for them.

If someone stopped me on the street and asked me how to invest for retirement, this is probably what I would tell them. I’m not going to go into details here; rather, I’m going to cover things in as broad strokes as I can, in order to cover as much area as possible. There will be posts in the future that hash out the details. (If you leave a question in the comments, chances are I’ll post about that sooner, rather than later.)

Standard caveats apply: your mileage may vary, you take responsibility for your own actions, and 2008 may in fact happen all over again.

Ready? Let’s go.

How much money should I put away for retirement? If you have any debt that’s at a 9% interest rate or higher, the answer is 0. (Possibly if you have debt at a lower rate, too, but 9%? Get out of town!) “Invest” that money in paying off your debt.

Second, think about what would happen if you were to die or become disabled. If there are people depending on you, strongly consider term life insurance and/or disability insurance, respectively, to cover you until you reach retirement age. (Yes, these subjects will eventually have their own posts.)

Once the high-interest debt is gone and you’re comfortable with your insurance, save up to the limit of your employer’s 401(k) match.

After that, things get tricky; this is one of the most individual aspects of saving for retirement. Here’s a rule that will work for most: whatever you’re saving, increase it by 0.5% of your total income every 6 months. (If you’re rapidly approaching retirement and have ground to make up, and/or have a lot of disposable income, shoot for 1% or higher.) The increases are small enough that you won’t feel like you’re sacrificing the present (and your youth!) for the distant future, but over time you’ll start putting away truly impressive amounts of cash.

What vehicle should I use for the money — 401(k), IRA, brokerage, what?

First rule: contribute to the limit of your employer’s 401(k) match. As anyone will tell you, it’s free money.

Second rule: if at all possible, put it in a tax advantaged account. That means no non-IRA brokerage until you’ve maxed out everything else.

Beyond that, the choice is less important. In general, a good order is this: 401(k) to match, Roth IRA (if possible) to max, 401(k) to max, brokerage account.

Finally: what should I invest in?

Take a stab at what age you can reasonably retire. If you have no earthly idea, 65 isn’t a bad number. Figure out what year it will be when you turn that age. Round up (to a later year, and a higher stock-to-bond ratio) to the next higher multiple of 5 if you’re feeling aggressive; round down (to an earlier year, and a lower stock-to-bond ratio) to the next lower multiple of 5 if you’re feeling conservative. As an example: If I’m 34 this year and pick an (arbitrary) age of 65 at which to retire, that will put me at (2012+(65-34)=)2045 or 2040.

Next, put your money in a target date retirement fund for that year. If your money’s in a 401(k), that’s easy; you’ve only got one option for any given year. If it’s in an IRA with a big brokerage like Schwab, Fidelity, T. Rowe Price, or Vanguard, use their funds (e.g. Fidelity Freedom Funds or Vanguard Target Retirement Funds): generally, you’ll be able to invest in it with little or no fees (beyond the expense ratio, of course). If you don’t have a brokerage, or don’t like yours, I highly recommend Vanguard (and no, I don’t have any relationship with them, other than using them for our personal accounts). If you don’t have the minimum for a given fund, put the money into an online savings account (e.g. ING Direct) until you do.

That’s it. No, really, it’s that simple. As I said, your mileage may vary, but the advice above will get 90% of you 90% of the way there. Is it what I would advise if you were to hire me to take a look at your situation in particular? No. But it’s not far off, either. (And yes, there will eventually be a post on how to handle your investments/withdrawals in retirement, which is a whole other matter.)

Questions? Let ’em fly.

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