The Truth About Retirement
from daveramsey.com on 22 Mar 2010
Myth: When saving for retirement, the more complex strategies earn you more money.
Truth: Saving for retirement must be consistent—not complicated. Invest only when you’re ready financially, and never invest in something you don’t understand.
We’ve been led to believe that the more complex an investment is, the more likely it is to make money. Nothing could be further from the truth. You can retire with dignity using just a few tools and some good advice.
Begin With a Firm Foundation
Dave Ramsey has taught more than one million families how to get out of debt and build wealth. He recommends you begin investing for retirement after you’ve done two things: you’re debt-free, and you have saved an emergency fund of three to six months of expenses. Three-fourths of the people on Forbes list of the 400 wealthiest people in America say getting and staying debt-free is the most important thing you can do when it comes to handling your money. The full emergency fund insures you have a cushion in case of an illness or job loss and that your retirement funds stay where they are and keep growing.
A Simple Plan That Works
Your income is your most powerful wealth-building tool, so once you’re debt-free, invest 15% of your income in Roth IRAs and pre-tax retirement accounts. If you receive a 401(k), 403(b) or TSP match from your employer, invest up to the match. Then, fully fund a Roth IRA for you (and your spouse, if married). If that doesn’t add up to 15% of your household income, invest more with your employer plan until you reach 15%.
Here’s an example:
|Household take-home income:
|15% of $70,000
|Husband’s 401(k) matches 3%*
|Wife’s 401(k) matches 4%*
|Remainder into Roth IRA
(Couples under age 50 can contribute up to $11,000 per year to a Roth IRA. There are income restrictions on Roths. Consult a professional to be sure you qualify.)
*The employer match does not count toward your 15%. However, it automatically doubles your investment in your 401(k)!
Put your retirement money in growth stock mutual funds with a track record of at least five years of consistent returns. Divide your portfolio equally among growth, growth and income, international and aggressive growth funds.
This Is Long-Term Investing
The money you invest for retirement is not to be used for anything other than retirement income, for two really good reasons:
- The longer your money stays invested, the more it can grow. Over the last 30 years, the S&P 500, a standard measurement of stock market performance, has averaged a 12% growth rate.
- You’ll be hit with high penalties and taxes if you take money out of these investments before age 59 1/2. Never borrow from your 401(k), and always roll your 401(k) balance into a traditional IRA or your Roth if you change jobs.
After investing for 25 years averaging 12% per year, the couple in our example above will have nearly $1.6 million saved for retirement!
Get Some Good Advice
It’s a good idea to work with a professional advisor when you’re choosing retirement funds. Dave has developed a network of professional retirement advisors, called Endorsed Local Providers (ELPs), who don’t work for him but base their advice on his common-sense teaching. Each ELP can answer your questions and help you get started investing the right way.