Beginner Investing for Retirement

This is going to be a first in a series of investor articles aimed at helping you get ready for retirement.  This particular article will address how the beginner should be investing for retirement.  What do we mean by beginner?  We're talking about those that are just starting their careers and have time on their side.

That's right, we're talking about individuals that are under the age of 30 and the strategies they can use to build a financially secure retirement.  But some of you might be questioning why we would bother discussing retirement planning for workers with 30 or 40 years to go in their careers.

Retirement Strategies for the Young

We're starting with this group because they've got time on their side.  These are young people - just starting their careers - with the opportunity to put into place a retirement strategy that is relatively painless.  This is certainly something that can quickly pass by those of us if we procrastinate - and it's a relatively small window of opportunity.

Compounding Interest and Earnings on Earnings

We're talking about the simple compounding of interest - earnings on earnings.  We're talking about how $10,000 invested today can grow to be worth a $100,000 or more at retirement.  By recognizing early in your career that beginning a retirement plan is an important long-term strategy, you can save yourself a lot of anguish later on.  If you wait until you are age 50 to start a retirement plan there is one thing you can be certain of - it will be financially painful.

Expensive Life Events and Retirement Planning

Retirement is just one of life's events that we need to consider when looking at our overall financial well being.  But there are some other pretty big events in life that are also worth considering when you do your financial planning.  We're going to remind you of these events because they will all pull on you financially and can even throw off your retirement plans.

• Marriage - many people eventually get married and getting married can be expensive.  Even a relatively "modest" wedding and reception can cost over $10,000.  And according to Fairchild Bridal Group's annual survey, the average wedding cost over $26,000 in 2005.
• Children - many people also have children and these little friends are also expensive.  The rule of thumb is that it costs roughly $250,000 to raise a child from birth to age 18.  And that number only includes housing, transportation, childcare and food.
• College Education - beside feeding and sheltering your child you might also decide to send them off to school - so they too can be financially independent, just like you.  The average cost of a private education is roughly $120,000 in today's dollars.  For a public education, you're talking closer to $40,000 depending on the school.

The point we are trying to make with just these few examples is that there are certain life events that are expensive.  And that's only half the story because our list didn't even talk about things like paying for your child's wedding, buying or leasing cars, paying back your own school loans or buying a home.

Life is a wonderful thing and like many things retirement is a pay me now or pay me later arrangement.  It's easier for most of us to address our immediate financial needs and worry about things like retirement later on.  But we can guarantee you one thing - if you begin planning for retirement now; it's one less financial burden later on.

Retirement Saving for Beginners

If you're a beginner looking for ways to save for retirement, then you're in luck because you've got lots of options.  And unlike your older counterparts in the workplace, you don't need to be as aggressive in putting money away.  We talk about this more in-depth in our article on retirement planning in your 20s and even provide some examples that demonstrate how helpful it can be to start saving early.

Most of us - whether young or old - have multiple options when it comes to retirement funding.  The two retirement plans that are universally available include:

• Traditional and Roth IRAs
• Social Security

And depending on your employer, you may have these additional retirement account options where you work:

• 401k Plans and the recently introduced Roth 401k
• 403b Plans and the recently introduced Roth 403b
• Traditional Pension Plans

We're going to begin discussing each of these plans, but we're going to mix up the order a bit - and for good reason.  We're going to talk about each plan in the order you'd most likely start to fund a retirement plan.  For example, 401k / 403b plans will be mentioned first because employer matching usually makes these types of plans your most desirable first-stop for a retirement fund.

401k / Roth 401k Plans and 403b / Roth 403b Plans

If your employer offers you a 401k plan or a 403b plan at work, then this is probably the best place to start your retirement savings.  The nice thing about 401k plans and the 403b is that they provide a tax shelter because the money you put into the plan is normally on a pre-tax basis.  Employers also generally match employee contributions to increase plan participation, providing you with an instant return on investment for the money contributed to the plan.

In 2006, companies were first allowed to introduce the concept of a Roth 403b or Roth 401k plan.  While the money placed into these accounts is on an after tax basis, all the withdrawals - including growth in the account balance - are made on a tax free basis.

IRA Plans

You second stop along the retirement planning road should be with IRAs.  In particular, Roth IRA plans can be a great way to save for retirement because the money that goes into the plan is after-tax, but at withdrawal all the money from the fund is tax free.  Just a word of caution - there are lots of IRA rules and contribution limits that apply.  But overall, IRA plans can provide you with a great source of retirement income.

Pension Plans

Pension plans today are getting more and more complex.  There are employee-funded pensions and traditional pension plans.  If you're with the same company for many years, a pension can be a significant source of retirement income.  If you plan to job hop throughout your career, you might not want count on a pension plan for retirement.  That makes 401k plans and IRA plans even more important to your retirement plan.

Social Security

If you're under the age of 30, relying on Social Security might not be a good idea.  While many politicians will promise that Social Security will be around forever, the future of that plan remains uncertain.  Until that debate is settled, your retirement future might need to have a backup plan - just in case Social Security disappears.

Retirement Planning Spreadsheet

Finally, we've put together a simple retirement planning spreadsheet that you can download for free.  Just be warned that there are lots of simplifying assumptions on that spreadsheet.  The best way to use it is to play "what if" scenarios.  For example, you can see what happens to your retirement income if Social Security disappears.  You can also see the impact of 401k plans and IRAs can have on your retirement years and the level of funding that might be appropriate in your situation.

If you'd like to run through retirement planning scenarios, we've also got a complete line of retirement calculators that can help you figure out how much money you'll need in retirement and / or how much money you need to save each year until retirement.

That's right, we're talking about individuals that are under the age of 30 and the strategies they can use to build a financially secure retirement.  Why would we bother discussing retirement planning for workers with 30 or 40 years to go in their careers?

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