Key Points
When I started working, I made some mistakes with my retirement savings. Unfortunately, I now have to save more to end up in the same place I would have been had I invested earlier and been wiser.
Of course, I’m far from the only one making these mistakes. I know I’ll recover because I’m committed to investing now, but I wish I knew these three things about retirement investing when I was younger.
1. Investing early allows you to invest way less
One of the biggest mistakes I made was waiting too long to start investing for retirement. When I was working in college and law school, retirement investing wasn’t really on my radar. And during my first year of working, I put off retirement savings in favor of saving up a down payment for my house.
At the time, it felt like I had other priorities — but now, looking back, I wish I had started investing even a small amount sooner. The power of compound growth over many years would have made it much easier to hit my retirement savings targets.
In fact, if I had invested just $100 a month from age 19 to age 25, and earned 10% average annual returns, I’d have $9,258.73 invested. That money, sitting in an investment account earning 10% returns from age 25 to 65, would have turned into $419,043.23. Knowing what I know now and seeing those numbers, I’d have found the $100 a month.
2. Index funds are a simple and easy approach to diversification
Another thing I wish I knew when I started investing was that I could quickly and easily build a diversified portfolio even without advanced knowledge of how the stock market works. I initially tried investing in different stocks across different sectors to diversify. And while this can be a great strategy if you know what you’re doing, I didn’t take the time to learn.
I just bought shares of companies based on businesses I heard of, without really having a cohesive strategy. While some of those investments have turned out OK, I could have done better if I’d realized that I could just buy low-cost index funds like those tracking the S&P 500.
An S&P index fund provides pretty much instant diversification and has a consistent track record of producing 10% average annual returns over the long haul. That would have been a simpler, more stress-free choice, and my portfolio would have performed better.
3. A Roth IRA can sometimes be a better bet even without upfront tax breaks
Finally, the last thing I wish I had known was that a Roth IRA offers advantages over other retirement plans, even without the upfront tax breaks. I initially really wanted that upfront tax savings, so I put my money into a 401(k) and a traditional IRA.
However, a Roth can allow you to withdraw money tax-free as a retiree, and I think my tax bracket may be higher in retirement since I believe tax rates will go up over time. A Roth IRA can also reduce the chances of owing tax on Social Security benefits. So now, I think it would have been a better bet.
Fortunately, I’ve corrected course, learned from my mistakes, and am building a diversified portfolio of index funds in my Roth accounts. While I have to invest more than I would have if I started earlier, I’m glad I turned my retirement planning around before it was too late.
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