We think it’s safe to say that the average working person in the U.S. doesn’t know a great deal about investing. Not only that, but the topic can even provoke anxiety, most often because the cost of a mistake in this sphere can be high. If your company just began offering a 401(k) plan, or you are thinking about opening an IRA through your company or on your own, we have a few suggestions for some things you should do to make investing easier — and to get the most out of your investments.
1. Calm Down
If you’re scared of investing, understand that this is quite common, but also unnecessary. It’s true that you don’t want to jump into investing without any preparation. But what happens too often is that potential investors become overwhelmed when they consider the enormity of learning about investment strategies, and this paralyzes them and prevents them from moving forward. We would almost be so bold as to suggest that such a scenario is worse than making decisions blindly.
Rest assured that if there was one specific way to invest correctly, everyone would have done it by now and they would be rich. But only some people are rich, and their investments are often not why.
Trust yourself. Start small and vow to make slow and steady progress. Once you begin to understand more and see the fruits of your labors, you will gain the confidence you need to continue.
2. Use Proven Models
A 401(k) is considered superior to an IRA because it allows you to save so much more money. The employee contribution limit for a 401(k) in 2024 is $23,000. The limit for an IRA is $7,000. The downside is that a 401(k) often doesn’t allow you many choices. Sometimes your choices are limited to what percentage of your contributions you want to allocate to the three main areas of investments — stocks, bonds and cash investments.
Many timid investors find this not a drawback, but a plus — no big decisions to make! And we get it. It works for some people. If this is how your company’s 401(k) works, just know that you have the option of opening your own IRA that will allow you more flexibility in choosing what you want to invest in. Take some time to read up on not just stocks that perform well, but might also tie into your interests, such as sustainable agriculture, technology or business.
Regardless of how much choice you are allowed with your retirement portfolio, it’s easy to find pie charts and standard recommendations on what percentage of your contributions you want to allocate to specific types of investments based on your age and risk tolerance.
For instance, experts recommend that younger investors allocate more of their contributions to stocks than older investors. As time goes on, you may want to put more money into a bond ladder, which provides income over time as each bond reaches maturity. Experts further recommend that as you approach retirement, you keep enough cash on hand to cover a year’s worth of expenses, and two to four years’ worth of expenses in short-term accounts. That’s because you want your money to still work for you, but you want to be able to access enough in the event of a downturn. Most downturns don’t last beyond four years, hence the recommendation.
3. Make a Roadmap for Retirement
If you’re in your 20s or 30s, retirement may seem like it is still far off. And by some yardsticks of measurement, it is. But hopefully you have seen some charts showing how important it is to start investing early, even if you don’t have as much to invest. In the early stages of investment, it may be difficult to tell how much you will need to save for your retirement. There are mathematical models, to be sure, that give you some numbers based mainly on your age, but also on a few other factors. They are hardly individual, however. Some factors to consider when you’re planning for your retirement include:
- How much will you collect in Social Security? This number can be affected by not only a change in income, but also a change in marital status or the age at which you choose to retire.
- Do you have a pension? Most workplaces don’t provide pensions anymore, but if you’re in a government career such as teaching or public safety, you may still get a pension.
- Will you work in retirement? Many people imagine they will travel extensively or just relax in retirement, but both of these can get boring. A place to go every day and a little money in your pocket during retirement can make a difference.
- Do you expect to share expenses with a partner? Most often this is a spouse, but it can be a family member or another person who splits living expenses with you.
4. Approach Investing as if It’s Fun (It Is!)
You may see the value of your investments rise and fall over the years, and world events can affect this, including war, famine, weather, global pandemics and more. But investing isn’t like poker or a horse race, so there is no need to panic at the thought of losing a lot of money. As long as you diversify (don’t put all your eggs in one basket!), you should be fine. It’s satisfying — at any age — to watch your money grow and to know that you’re doing important work to take care of yourself and your family in your golden years.
