Quite often the biggest problem young people face when beginning to save or invest is simply getting started. As with many things, it’s also true of investing that the first step is the hardest. The financial world can be intimidating, and the prospect of building a portfolio that can last through retirement can be worrisome. To help ease the worries of those just starting out, this week’s column will explore the basics of investing, including some do’s and don’ts.
The immediate question for most beginning investors is this: “How much should I save?” Well obviously the ideal answer is “every penny possible,” a more realistic round-number expectation is to save, on average, 10% of each paycheck. If you find that you can’t live on 90% of your pay, you probably can’t live on 100%, and something needs to change with your spending habits.
Once some money has been put aside out of each paycheck, the next question, often the most intimidating and over-analyzed, is what kind of account to setup. Today’s laws allow for almost innumerable types of investment accounts, the most common being personal investment accounts, IRAs (Individual Retirement Accounts), and Roth IRAs.
What investors really need to understand about the different types of accounts available is that they have little or no bearing on what investments are being bought or sold. These different types of accounts really only have tax implications, and the best choice for any investors usually comes down to their own circumstances. An accountant is typically a good person to consult on such questions.
However, there are some differences with employer-sponsored plans, like 401(k)s. Many of these plans limit the investments that employees can make, but they might also match employee contributions. All of these things need to be taken into consideration when decided whether to participate. Unfortunately, investors who qualify for an employee-plan are typically prohibited from setting up their own retirement accounts. You can thank the IRS for that little rule.
Another big thing to consider about retirement accounts, like IRAs, is that they usually impose restrictions on funds that enter the account. These restrictions don’t deal so much with what investments can be bought or sold, but when investors can get their money out. For example, if a 30-year old investor has $50,000 in an IRA, they can’t withdraw that money for cash without facing penalties until they are about 60 years old (with certain exemptions).
This leads into our next point: Think with a long-term perspective. It isn’t wise to invest money that you know you’ll need in the next two years. You run the risk of losing money, or maybe you missed the fine print, in which case you might have to pay penalties to get money out of an account.
Typically it’s best to avoid systems that lock-in money whenever possible. IRAs can be beneficial for tax savings, and they still allow for plenty of investment opportunities, but it’s usually best to avoid annuity and insurance products as investments. They typically carry massive penalties associated with early withdrawals.
For additional perspective, look for an advisor, even if you ultimately decide not to use one. Simply meeting with advisors can introduce a lot of ideas you may not have even considered before. Remember that these are people who make their livings in investments.
Whether you end up managing your own account, or relying on someone with additional expertise, the last piece of advice is not to swing for the fences. Hitting homeruns certainly is glamorous, but it’s not a reliable strategy. Getting started young provides investors with years to accumulate the next egg they need to support them through retirement. This is a race for the slow and steady.
This blog is written weekly by Dock David Treece, a registered investment advisor with Treece Investment Advisory Corp. It is meant to share insight of investment professionals, including Dock David and his father, Dock, and brother, Ben, with the public at large. The hope is that the knowledge shared will help individuals to better navigate the investment world.