March 15, 2020

How to Start Investing for Retirement

When you’ve mastered your budget, it’s time to start planning for your future.

Start soon.

The concept is simple: your money grows over time so the more time it grows, the more you’ll have. This is a result of compound interest, which means your investment returns start earning their own return, snowballing over time. In practice, that means if you invest $200 per month for 10 years and earn an average annual return of 6%, at the end of the 10 years you’ll have $33,300. Your contribution over time would be only $24,200 meaning the remaining $9,100 is interest you’ve earned.

The stock market comes with ups and downs, of course, but starting earlier gives your investments more time to grow.

Decide what to invest.

The amount you invest depends on your goals and when you want to reach them. If you have a retirement account, like a 401(k), and your employer offers matching dollars, your first goal should be to contribute at least enough to earn the full match. Don’t miss out on free money! Generally, it’s recommended that you invest a total of 10% to 15% of your annual income to your retirement.

Open an investment account.

If you don’t have a 401(k), you can invest for retirement in an individual retirement account, like a traditional or Roth IRA. A common misconception is that you need a lot of money to start investing. Work with a personal banker at your local branch to find a broker or account that’s right for you and your investment goals.

Understand your options.

Regardless of the type of investment account you have, you will choose what to invest in. It’s important to understand each investment type and the risk it carries. The most common investment types for those starting out include:

• Stocks: A stock is a share of ownership in a company purchased for a share price. Share prices can range from a few dollars to thousands of dollars, depending on the company.

• Bonds: A bond is basically a loan to a company or government entity. Investors earn interest in the years it takes the company or government entity to pay it back. Bonds are typically less risky than stocks but earn lower long-term returns.

• Mutual Funds: A mutual fund is a mixture of investments packaged together to allow investors to skip the work of picking specific stocks and bonds and instead purchase a diverse set in one transaction. Having a diverse portfolio of investments is generally less risky than individual stocks. Professionally managed funds can have high fees or investment thresholds, but index funds are able to charge lower fees. Most 401(k)s offer a selection of mutual or index funds with no minimum investment. Outside of a 401(k), mutual funds may require a high minimum investment.

• Exchange-Traded Funds: Similar to a mutual fund but are purchased for a share price and can be traded throughout the day like a stock. The share price of an ETF is often lower than the minimum investment requirement of a mutual fund.

Decide on an investment strategy.

Like the amount you invest, your strategy depends on your financial goals and how much time you have to reach them. If you’re looking long-term, like over 20 years, the majority of your investments can be in stocks. For most people, an ETF or mutual fund is a good idea as it is less time consuming than picking individual stocks.

Starting to invest for retirement can be complicated. Drop by your local branch to speak with a personal banker and learn about different options and strategies and find out what works for your budget and financial goals.