Easy 5 Step Plan for a Successful Retirement
I used to want to be a financial planner. But after studying finance in school and doing a ton of learning on my own, I realized that the only way I could make a living at it would be to sell people things that weren’t in their best interest. I can be an amazing sales person, but I have to believe what I’m selling otherwise I lose all motivation.
When I was in college, I was a member of our Investment Portfolio Organization. Why an organization instead of a club? Simple: IPO is a much better acronym for an investment club than IPC. Anyway, we did a lot of presentations on stocks and had speakers come in and tell us about different professions that we could explore with a finance degree. There was a time when we were looking for a few people to fill open slots of time, and I volunteered to take one of them. I was a bit worried about how it would be perceived because I was the black sheep in that group: I don’t believe in actively investing in individual stocks.
I have a different method which I believe is far superior; in fact, I’ve spent many months reading countless books about this, listening to Dave Ramsey’s 3 hour radio show each day, and watching Susie Orman each week, and spent well over 30 hours preparing a 133 page PowerPoint deck walking people through my thinking and showing them why I believe what I do. It only takes 45 minutes to go through, and usually generates a lot of questions. But there are a lot of people that care less about the why and more about what to do, so I’ve distilled it down into a much shorter blog post. This is what I tell my family and friends to do. Both my brother and sister follow it. In subsequent blog posts I may go into more depth surrounding specific topics (my clever way of incentivising you to come back and read more of the things I write!).
So here’s my advice for my friends and family members (especially my young cousins and nieces and nephews!) and anybody else that wants to do the right thing for your financial future (few finance professionals will tell you this, because they don’t make money when you do the best thing for yourself):
- Pay off your credit cards
- Open a Roth IRA with Vanguard
- Setup an automatic investment plan to transfer a fixed amount of money each pay-period to Vanguard (called dollar-cost averaging)
- Invest in a no-load index mutual fund from Vanguard (lowest fees in the industry and no commissions). If you don’t know what the S&P 500 is, choose their targetted retirement accounts. Otherwise consider VFINX or choose your own.
- Invest the annual maximum (currently $5000; if you think you can’t do this, remember it’s only $13.70/day. If that’s still too much, then invest the maximum you can and go read some Dave Ramsey (except, don’t buy it; go borrow it from the library)!
Now let me head off a few questions:
Can I wait until I have more money? NO! The graphics below illustrate why:
This shows how much money you’ll have at retirement given the number of years you can invest (subtract your current age from whenever you want to retire to find out how many years you have left). Then find the percentage return that you typically make on your investments (assume that your Vanguard no-load index mutual fund will earn you 7.5% on average). Now you know how much money you’ll have! (How much you actually need is another blog post, but there are only a few inputs to this equation: invest for a longer period of time (aka delaying retirement to work at Wal-Mart), get a larger return on your money (risk inevitably increases as returns do), invest more money, or marry someone filthy rich. The last one is great if you can get it; getting a larger return is possible, but requires more work; investing more is possible, but you then need to work hard to earn that money. The easiest way to accomplish this is to let your money work for you for a longer period of time. So let’s look at an example:
This image shows two people: Frugal Fred is on the left and started maxing out his Roth IRA when he was 20. After investing for 10 years, he had to stop because of other expenses. Spendy Sam on the right really enjoyed his 20s, and never had anything left over to invest. He decided to get serious when he turned 30 and invested $5K from then until retirement. At age 65, Fred’s $50K investment had turned into $2.2M while Sam’s whopping $180K investment was only worth $1.4M. This is why you cannot wait to start investing!
Okay, so some of you smarty-pants noticed that those illustrations used a 10% return? The image below shows the same scenario except with different levels of return: the higher the return, the more important it is to start earlier!
Why should I invest in no-load index funds? You can’t pick the right stocks yourself nor can your broker (remember they’re broker than you are). Plus they charge high fees. Maybe you think a few percentage points don’t matter much? Go back and look at that first graph. Notice that approximately every 2.5% change in returns means you have double the amount of money at retirement! But here’s another opinion:
Let me add a few thoughts about your own investments. Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.-Warren Buffett*
*1996 Berkshire Hathaway’s Chairman’s Letter
Good luck! Feel free to e-mail me with questions!