This week we are excited to invite High Water Women Volunteer, Nancy Vailakis, for a post on saving for retirement.
Nancy Vailakis is currently a Senior Advisor at Socium Fund Services and a Contributing Writer to Alternatives Watch magazine. She worked in investor relations and business development at hedge funds and private equity funds for almost 14 years and holds an MBA from NYU Stern.
The majority of people today are not working in careers that promise a pension as part of their benefits.
Many employers offer 401K benefit plans, sometimes matching what you contribute in large or small ways, but ultimately, if your employer isn’t investing money to pay for your expenses when you retire, then who is? The answer should be: YOU ARE! All of the millions of workers whose employers do not offer pension benefits are in charge of their own retirement planning.
The good news is that if your employer does not offer retirement resources, it really isn’t as complicated and difficult as you might think. And it’s never too early to start.
All you need to do is:
- Have a small amount of money to begin (even $100 will do, although some target date funds require higher minimums that may require you to save first);
- Make a commitment to add more money on a regular basis (again, small amounts are fine, even $20-50 per week will begin to add up over time) – set this up so that the deposits are made automatically and you’re not tempted to spend the money on something else;
- Open a brokerage account (easy to do online); and
- Pick a retirement target-date mutual or index fund.
A target-date fund will allow you to “set it and forget it”. You pick the year or time range in which you think you’ll want to retire and the people managing the mutual or index fund will adjust the fund’s holdings over time to both grow your investment and manage risk. These types of investments don’t need to take up your time and attention as such an investment is diversified across stocks, bonds and cash.
Target date funds that are set for a retirement further into the future tend to be more heavily weighted in stocks and have a higher risk profile today than target-date funds that are set for a closer retirement date, which tend to be more heavily weighted in bonds, and angle more toward what is called an ‘income’ portfolio. Income portfolios tend to hold investments that are both safe (focused on protecting vs. growing your investment) and yield cash (through dividends or interest coupons). This portfolio composition is useful for a retiree or near-retiree who may not be working as much and needs money to cover expenses.
The idea here is that a longer runway until retirement means that you, the investor can take more risk. With a shorter runway until retirement, a less risky portfolio that produces monies to be used for expenses tends to make sense.
As you advance in your career, and begin to make more money, always consider adding to this account a portion of any raise you receive to increase the amount of your automatic deposits.
Retirement may be more expensive than you anticipate. It’s wise to start addressing this as early as today. Here is a useful retirement calculator that helps you break down exactly how much you should aim to save each month based on certain assumptions that you can adjust. For fun, try playing around with the retirement age and see how the monthly savings target changes based on how much or how little time you have. Because of compound interest (interest earned on interest), starting early – even if you’re saving only a tiny amount each month – makes a huge difference.
Here are a few examples of target-date funds you might consider: