On Friday I talked about a study that I had read from the Employee Benefit Research Institute that gave the average retirement savings by age group. The numbers that it reported were quite scary to say the least.
The report showed that 60% of workers of all age groups had less than $25,000 in savings. 80% had less than $100,000. Even when you look at those who were closer to retirement, ages 55+, 60% of them had less than $100,000 saved for retirement. Their average retirement savings for that age group was only $65,000, and the younger age groups had even less!
The numbers are sobering, but the good news is that you don't have to be average. You can rise above and be one of the outliers in studies like these. Bump your retirement savings into high gear and become an example of how to succeed at saving for retirement.
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Why Are People Not Saving For Retirement?
The question I have is why aren't people saving for retirement, or saving enough? Some of the possible reasons I've come up with and found online include:
- They think Social Security will be enough.
- They're not able to save after monthly expenses.
- They don't plan on ever retiring.
- They underestimate how long they'll live in retirement.
- Family will take care of them.
There are a myriad of reasons why people aren't saving enough for retirement, and many of them are based on false assumptions. People assume that they won't need as much as they will in retirement, or that they won't live as long as they do. They assume that the government will take care of them through Social Security, but the program is already heading towards insolvency. People assume they'll work into old age, but they end up becoming ill.
While there often isn't much you can do to save more if you're underemployed or unemployed (which is a very real possibility these days), for most people there are things you can do to cut back on your expenses, increase your income and bump your retirement savings into high gear.
Kicking Your Retirement Savings Into High Gear
Kicking your retirement savings into high gear can only happen when you're in a position where you're not constantly dealing with a ton of debt, or other obligations. So what can you do to get to a place where you can start maxing out your accounts?
- Get rid of your debt: Getting rid of all your non-mortgage debt is a good first step as it will give you a nice chunk of extra money that is no longer slated to go directly to your creditors. Take those extra payments and pay them to yourself.
- Cut un-needed expenses: There are a lot of ways that you can save when it comes to regular monthly expenses. Cut the cable TV, cut those magazine subscriptions, cut the high priced landline.
- Cut back on necessary spending: You may need to have certain regular monthly spending, like for your phone bill, but at least do your research and find cheaper alternatives or ways to save.
- Find ways to increase your income: Whether it's increasing your day job income, or coming up with streams of side income, adding dollars to your bottom line can help you to reach retirement savings goals.
- Change your behavior, make saving a priority: Probably the biggest reason that people don't end up saving enough is because they're not able to change their behavior. They know they need to save, but they never get around to opening a retirement account. They know they could save $100-200 or more every paycheck, but they never get around to setting up the automatic contributions. Make a change in your behavior, set a goal and get saving.
So once you've gotten rid of your debt, cut back on extraneous expenses, and set about increasing income, where are the best places to get started investing?
Best Places To Open A Retirement Account
If you don't have a company 401(k) or don't get a company match on your investments, getting started with investing is as easy as opening a Roth or Traditional IRA with the brokerage or mutual fund company of your choice.
Where are some of the best places to open a retirement account? There are a few places that I recommend that I either use myself or have heard rave reviews about. They are easy to use and open an account, have low costs and can be used by just about anyone. Here are my top 6.
I currently have a Roth IRA and regular taxable investment account with Betterment.com. Betterment is a great choice for people who are just getting started investing, or for people that want to invest but don't want to spend a lot of time worrying about doing research, re-allocating investments, etc.
Betterment basically has two baskets, a bond ETF basket and a stock ETF basket – and you just choose your risk tolerance using their tools and choose an allocation of stocks to bonds. The company will then allocate your funds and regularly balance your portfolio so that you stay on track towards your goals.
Betterment is exceedingly simple to use and the fees they charge are low and reasonable.
Also, if you open an account now, you get $25 if you open an account with at least $250.
I recently became aware of the investment service Wealthfront. Like Betterment, Wealthfront offers highly diversified ETF index fund investing, at an extremely affordable rate. They use Modern Portfolio Theory along with a risk tolerance assessment when you sign up to put together a portfolio that fits your goals.
While they do have a $5000 account minimum, what they have going for them is that your investments are managed for you for FREE – up to $10,000 of investments. You can get even more managed for free by referring other users. They're definitely one of my top recommendations for newer investors if you can swing the $5000 initial investment (because they're free!)
Vanguard is another one of my favorite companies. They're known for their great low cost mutual funds, many of them index funds with low initial investments of around $1000. If you're just getting started they are a great place to invest, and you can setup a simple 3 fund portfolio that allows you to get a broad diversification across the entire stock market – with some of the lowest fees in the industry.
Vanguard has consistently been the lowest cost fund provider over the past 30+ years, and since the name of the game when investing for the long term is minimizing costs, Vanguard should be at the top of your list.
TD Ameritrade has been consistently rated as one of the top brokers in the industry. In fact, Barron's 2013 online broker ratings listed TD Ameritrade as their top pick for long term investing, as well as top pick for novice investors.
Why are they rated so highly? Low cost, their online trading tools, research and education tools are second to none. Plus, opening a retirement account with them is simple and shouldn't take more than 15-20 minutes – so no excuses on that point!
Also, when you open an account now you can trade free for 60 days and get up to $600 in cash bonuses deposited into your account.
While they are similar to some of the existing robo advisors in that you can choose a pre-built investment portfolio, set it to auto-invest, rebalance and just let things ride, they also offer a whole lot more flexibility.
In addition to their pre-built portfolios, you can customize any portfolio to your heart's content, or create your own custom one. Buy individual stocks, ETFs, or whatever you want. You aren't contained to a set list of ETF funds. If you want to hold some individual bio-tech stocks in your portfolio, or buy some Apple stock just for fun, feel free! It's free to trade!
I'd definitely recommend checking out M1 Finance as they're one of the more innovative, low cost robo advisors out there today. You can use it like a traditional robo advisor, or use it like a traditional brokerage account to buy individual stocks. It's a hybrid that gives you the best of both worlds!
Wealthsimple was launched in the U.S. market in January 2017, and has quickly become one of the premier options for people looking to have a simple, effective and automated investment portfolio.
Their portfolios are created and based on the ideas of Modern Portfolio Theory, and those proven strategies are the sound basis for a good long term investing portfolio for anyone.
Cut Spending, Increase Income, Open An Account And Start Investing
Starting to invest really is as easy as cutting your debts and regular expenditures, finding ways to increase your income (both from your day job and side incomes) and then opening an account with a low cost broker and starting to invest regularly – and automatically – as much as you can.
Figure out how much you think you'll need, figure out how much you'll need to invest – and start investing it today! When you can, bump up the amounts you invest when income allows.
So have you opened a retirement account and started to invest? If not, why not?