This is a guest post from Pauline of

I remember when I started working my first job, and my company introduced me to their match policy on retirement contributions. I was in my mid 20s, retirement was so far away I had actually never thought about it. I’d always been great at saving money though, I just didn’t have a goal in mind, further than the next holiday, or maaaaaybe, a deposit on a house.

Then they mentioned the free money, on top of the salary we had agreed on. I was sold. But everything seemed quite confusing.

What do you invest on?

Which broker do you pick?

What if you want to access the money early?

How much money should you invest each month?

Planning for retirement does not have to be that complicated. The answer to how much you should invest is as much as possible. Knowing that money will be unavailable for the near future, so you should invest any amount you can afford to leave there for the next 10 years or more. Especially if you put money in a tax deferred account such as a 401k, you would have to pay a 10% early withdrawal penalty if you end up needing the money before age 59 1/2.

You can work your contributions backwards from the amount you think you will need in retirement. Retiring with a million dollars in the bank is a goal for many people, and assuming an average rate of return of 8%, that would take

  • $700 per month for the next 30 years
  • $1,800 per month for the next 20 years
  • or $5,450 per month for the next 10 years

The best time to start saving for retirement was 10 years ago, but the next best time is today. Or you’ll have to find crazy sums in your mid 40s to make it work. Plus I don’t want to ruin your millionaire plans, but a million dollars won’t buy you many 30 years from now. Assuming a safe withdrawal rate of 4%, you are looking at $40,000 per year to cover your expenses. And that is before inflation. At 2% a year that is around $22,000 in today’s dollars. So you would need to save closer to $2,000,000 to make a $40,000/year retirement happen.

We just need to double the above figures! With the median family income just over $50,000 how can that possibly work?

First, you need to take advantage of that company match. The usual match these days is 3% of your gross income if you contribute 6%. On a $50,000 salary, that is a free $1,500. Plus, 401k and IRA contributions are pre tax, so if you invest $100 while being in the 25% tax bracket, only $75 will be deducted from your pay check. Another instant 30% return on your money right there.

Your next essential move is to use a low fee brokerage account, because fees can kill your returns. There are many on the market, with different minimum requirements to open an account, but most will have you if you bring $500 or less.

Third, if you don’t know what you’re doing, just keep it simple. You don’t want to spend hours researching stocks, because even fund managers who do that for a living often fail at predicting market moves accurately.

So invest in a selection of index funds, and keep adding money every month. Dollar cost averaging means you also don’t have to worry about market dips. You just keep doing your thing, and let time and compound interest grow your nest egg.

Last, if you are not making enough money to at least get your company match, it is time to make more. You can work more hours, start a business on the side, freelance,… or find other ways to contribute to your retirement account. The average tax refund is $2,800. If you only invest that every year for 30 years, you will have close to $350,000 for retirement. Just by resisting the urge to spend your tax refund on something you won’t remember this time next year.

You can use windfalls, gifts from your parents, even money you find in the street! Remember there will be no one to take care of you in retirement, so that is why it should be your number 1 priority. And if you follow these simple steps, it doesn’t have to be complicated. If you start early, you can even make a plan for early retirement. Which is much nicer than having to find a job in your 60s.

What is your retirement plan?

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