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5 Simple Lessons On Investing For Retirement Today

Holly Mangan is the managing editor of Money Crashers Personal Finance, a blog that provides tips for saving for retirement, building wealth, and utilizing investment strategies.

When it comes to planning for retirement, far too many people feel intimidated or are simply uneducated on the matter. For these reasons, they save next to nothing. In fact, one-third of all Americans have nothing whatsoever set aside for retirement, and half have less than $2,000. This is obviously a recipe for disaster, especially considering that the current U.S. Social Security system is in peril.

If you are among the large percentage of Americans lacking a solid retirement fund, don’t fret. With a little guidance and common sense, you can create a solid retirement portfolio – and you don’t need to be an investing expert to do it.

1. Start Now
Regardless of your age, you should begin investing now if you haven’t yet. Even if you have credit card debt, set something aside into a Roth IRA or your employer’s 401k. It doesn’t have to be a large amount, but a developed investing habit will serve you well once you pay off that pesky debt and have more to save. Plus, the real benefit to long-term tax-deferred investing is the benefit of compound interest. Since you aren’t required to pay taxes on your gains, the interest those gains can earn far exceeds a taxable account.

2. Start Simple
If you’re offered a 401k plan through your employer, take advantage of it, especially if your employer offers to match a percentage of your contributions. An employer match is basically free money to you. Plus, if you contribute the maximum to your 401k ($17,000 for 2012), your employer’s match will take the total annual contribution above this amount.

Furthermore, check if your employer offers a Roth 401k – like the Roth IRA, you can’t deduct contributions into this account, but they will grow tax-free, and you can take withdrawals tax-free during retirement. If you’re only offered a regular 401k, you may want to supplement it with a Roth IRA.

A Roth or traditional IRA is easy to open via a discount broker. To qualify, you must meet income requirements. However, these requirements are waived in most cases if your employer does not offer a retirement plan.

3. Educate Yourself
There’s a good chance you never took an investing course in high school or college. Fortunately, it’s never to late to learn. You already know you need to save money for your golden years, and you’re familiar with the standard vehicles in which to do it: a 401k, a Roth IRA, and a traditional IRA. But do you know how much you’re allowed to contribute annually to each of these accounts? Do you know when you’re allowed to make withdrawals? Do you know in what situations you will and won’t be penalized for making early withdrawals? The answers to these questions will affect which accounts make the most sense for you.

Beyond understanding the vehicles you’ll use to invest, you’ll want to investigate your investment options. First lesson: Keep it simple. In other words, stick to mutual funds. Mutual funds offer an array of advantages for folks who simply don’t have the time or head-space to analyze a slew of individual securities.

The next choice you must make is whether to invest in actively managed funds, which strive to beat a benchmark index like the S&P 500, or index funds that strive to replicate their benchmark index. There are advantages and disadvantages to both. Perhaps the most compelling reason to go with index funds is lower expenses. You’ll typically pay a lot more for an actively managed fund, which can eat away every year at your gains.

4. Evaluate Risk Tolerance
Now that you’ve determined which type of retirement plan or plans you want to invest in, you must decide which specific investments (which mutual funds) to purchase with your contributions. Fortunately, mutual funds – including index funds – offer automatic diversification. However, even after you choose between actively managed funds or index funds, you need to determine how aggressive you want the fund or funds you choose to be. Not only will this be determined by your comfort with taking risk, but also by your age.

For example, if you prefer to play it safe, but have a good 30 years until retirement, you’re going to want to push yourself to take some measure of risk in your retirement portfolio. Perhaps a mix of stocks and bonds via a balanced fund would be best for you. Alternatively, you could purchase an S&P 500 index fund and a conservative bond index fund to strive for a mix of risk and safety via the passive management approach.

On the other hand, if you’re nearing retirement and micro-cap growth stocks are more your style, you may want to tone it down by only allocating a small portion of your portfolio to these and the rest to blue chip stocks and bonds.

Complement this exercise with additional research to find out what level of risk makes sense for your age and the size of your retirement portfolio relative to your goals.

5. Save More Money
Make saving money a state of mind. Simple tips and practices can save a lot in the long-run: Turn off all lights when you’re not in a room, and unplug appliances and electronics when not in use to minimize the constant drain of power. Examine your bills to see where your money goes, and see if you can find ways to trim monthly expenses. Reduce heating and cooling costs by insulating your house and windows, and by lowering or raising your thermostat as appropriate. And always ask yourself if you really need what you want to buy. For example, the $100 you want to spend on new gadgets could eventually generate $1,000 if properly invested.

Next, start couponing. Try it for a month and compare your grocery bills to what they previously were. You can use convenient mobile apps like The Coupon App or you can go with the tried and true Sunday paper ads. If your grocery store still offers double coupon days, don’t miss out. Depending on the amount of food you buy, grocery savings could easily reach or exceed $50 per month. That might not seem like much now, but it could mean tens of thousands more to ultimately pad your retirement.

Final Thoughts
The number of years you have until you retire, how much you’re contributing, your current retirement assets, and your risk tolerance all play a vital role in determining how you’ll want to invest. Figure out approximately how much you’ll need for a nest egg by projecting what your expenses will be when you retire. Based on that, calculate what type of return and contributions you’ll need to get you there. Use a search engine to seek out “online retirement calculators” to help you with this. Also, look into life and long-term care insurance to protect that all-important nest egg in the event of the unexpected.

Getting started and getting the money into a proper savings account is the most important step. Once you’ve gotten your savings off the ground, be sure that your investments are protected and in line with your situation and goals.

Have you begun saving for retirement? If so, can you save more?

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