Before we can talk about retiring to France, we have to first talk about retiring. In my opinion, anyone can retire to France – bold statement, I know, but it’s true – but you need to become knowledgeable on how to invest properly and then affirmatively act on that knowledge. The good news is that my retirement strategy is easy to understand and you control your own actions. So here is my 8-point basic investing strategy:
1. Initially define what you want retirement to look like. Every year in the United States, plenty of people retire but there are chasms of differences in terms of what retirement looks like for one person and how it compares to retirement for another. In fact, what some would consider a perfect retirement wouldn’t be at all acceptable to others. So just like any other goal, if you don’t know exactly what you’re aiming for, your chance of hitting is pretty low. Setting a retirement goal can seem daunting but just by taking the first step you’ll see it’s not so difficult and it can bring everything into focus for you. Things I would suggest:
– Before setting your retirement goal, understand that the goal itself will change and evolve over the years so it doesn’t have to be 100% accurate right from the beginning. Perfection is the enemy of both progress and success, even more so if it delays you setting your goal.
– There is no one “right” retirement goal. Retirement is different for everyone and you can even have several goals if that’s what motivates you. What matters is that it’s your goal and right for you.
– Write it down and put a date on it. A goal is a daydream until it’s written down with a date.
– Describe it in clear terms that are meaningful to you.
– Put an initial approximate dollar amount down that you’ll have to save to achieve your retirement goal. It’s alright if it’s just a guess or estimate. At this point, you’ve accomplished the most important part which is to write down your goal and attach a number to it.
2. Have a simple financial plan. I mean an extraordinarily simple financial plan so you don’t mess it up. And for me, that plan is investing in a single S&P 500 Index Fund, period. Why? Because an S&P 500 Index Fund tracks the 500 largest companies in the U.S. and offers the average investor, of which I am one, three main advantages:
- Exposure to the largest parts of the U.S. Economy. You want this because American business will likely be the growth generator for the entire world far into the foreseeable future. Essentially, you are betting on Americans waking up every day, going to work, and energetically pursuing a better life for themselves and their families. Considering how many people want to come to America for a better life just like my family did over a century ago, there is no surer bet.
- Risk is spread out and minimized. Unlike picking an individual stock whose fortunes may go up or down with the wind, by investing in a diversified S&P 500 Index Fund it essentially doesn’t matter if one company goes up, down, or even bankrupt because you have 499 other companies that are balancing it out with their performance.
- It will prevent you from sabotaging yourself. To me, the biggest problem people encounter after not investing for their future is themselves. They begin to think that they can beat the market and start making speculative investments. Do not do this. Although you will see people who bet the farm on a single stock and retire rich, the vast majority of average investors who do this or invest in other similar speculative investments will lose money. A lot of money.
And while there are many other reasons, Warren Buffet, one of the most successful investors in the history world, offers the most compelling one. He has said many times that if you’re an average investor and don’t have the time, knowledge, or expertise to extensively research individual stocks, invest in an S&P 500 index fund – you’ll do very well and beat 80% of people who actively pick stocks. Good enough for me.
3. Start as soon as you can. I’m going to keep this short because the numbers can get a bit wonky. Just remember the dollars that you invest when you are younger are more valuable at retirement than the ones that you invest when you’re older, which means it’s very important to invest sooner rather than later so your money has more time to grow. Let me prove it to you. In the example below, assume an annual interest rate of 5% for both Person A and Person B and all other variables will remain the same:
Person A invests $1,000.00/year ($83.33/month) for 40 years from the age of 20-59 and then retires on their 60th birthday. They will have $120,794.94 in their retirement fund.
Person B invests $1,000.00/year ($83.33/month) for 30 years from the age of 30-59 and then retires on their 60th birthday. They will have $66,436.19 in their retirement fund.
Easy math. Person A wins by a mile and all they did was start investing sooner.
By the way, if you’d like to check these numbers for yourself (or enter your own specific numbers), click on https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator which will take you to Investor.gov, part of the U.S. Securities and Exchange Commission’s website.
4. Understand you are paying your future self by investing. The first person you should pay with your paycheck is yourself and you do that by investing a percentage of your income every time you are paid. Your future self will thank you profusely! Be on the lookout for negative thinking – many people feel that they are giving their money away to some unknown and nebulous investment account and they’ll never see it again. Frankly, I would strongly urge you to avoid that type of thinking – it’s not a one-or-the-other approach or all-or-nothing option. By planning appropriately, you will have money to be able to do the things you want when you are younger. But also remember, now that people are living longer thanks to medical advances, you definitely want to have the resources available to do what you want to do when you retirement comes along.
5. If your employer has a 401(k), use it. Much has been written on 401(k)’s so I won’t belabor it the topic but here are some key points:
– Begin investing on Day One of your employment.
– Invest at least the minimum amount needed to get the full match from your company, i.e., if your company matches 100% of the first 4% of your paycheck and then 50% of the next 2% of your paycheck, you should be investing 6% of your paycheck into your 401(k) and your company will then match it with an additional 5%. What’s this called? Free money.
– When should you withdraw this money? Not until your 59-1/2 years old when you can withdraw it penalty-free. Can you withdraw it sooner? Yes, but don’t do that. Ever.
– Your goal should be to invest 15% of your paycheck into your 401(k). This could take many years to reach and that’s fine. The most important thing is that you’re investing. If you need a strategy to reach 15%, try increasing your investment by 1% each year so that in 10-15 years you’re at 15%.
6. Don’t rob your future self. It’s worth saying again – don’t withdraw this money earlier than age 59-1/2. You’re only robbing your future self because you’ll have to pay a 10% early withdrawal penalty, taxes, and you’ll lose the compounding power of the money that you withdrew from your account. All bad things. Ok, so what are the true emergencies where you should withdraw money from your 401(k)?
– Real Emergencies. You are being evicted and have no place to live. Bonafide life-or-death medical emergencies. That’s about it.
– Not Real Emergencies. Generally speaking, anything else is not a real emergency in terms of withdrawing money from your 401(k). This includes medical bills, food (there are food banks for these situations), paying your children’s private school or college tuition, buying a new or used car, car repair bills, taking a vacation, home improvement, etc. I know the preceding list is tough but it comes from a good place in my heart. Remember, the dollars that you withdraw from 401(k) are likely the most valuable (or expensive) money that you’ll ever own – do everything you can not to touch it
7. Have a budget and think of your money as a tool. Budgets are good things. They’re like a hammer and anvil that allow you to forge your money into whatever you want it to be. Very powerful when you think about it!When people get into financial trouble, what’s the first thing that a debt counselor will do with them? Make a budget because not having a budget is likely one of the reasons they got into trouble in the first place. So why not skip the pain and frustration of not knowing where your money is going and just start with a budget? I’ll address this in a later blog post because there are more than a few ways to do a budget and which one is best for you depends on your situation.
However, if you want the basics of a budget, I like to keep it simple. Start with a sheet of paper (not an app – paper makes a budget real) and write down your household income on one side and all of your expenses on the other. The difference, if it’s positive, is what you have available to invest for retirement. If it’s negative, go back to your expenses and see what you can reduce or remove. If you still don’t have enough to make your investing number, consider adding more income. And if you have more available to invest than what you need, even better – you’re definitely on the right track.
8. Be flexible and prepare for change. Understand things in everyone’s life can and will change, both for the better and for the worse, so be ready to adjust your plans.
Unanticipated financial setbacks will occur. The odds of you experiencing one and have to temporarily reduce your contributions to your 401(k) sometime during the next 20-30 years are pretty good so you should have a clear strategic plan outlining what you’re going to do when it does happen – what I’ve called in my life “Crisis Action Plan Bravo”. In other words, turn the “unanticipated financial setback” into an “anticipated financial setback” and you’ll be better prepared to endure it financially, emotionally, and psychologically. Know how and where you’re going to reduce expenses, have an emergency fund (at least 6 months’ worth of easily accessible living expenses in a savings account), and consider multiple side hustles to generate as much extra cash as you can as soon as you can.
A sudden increase in income or sudden windfalls, while less common, still need your focused attention. This money can radically accelerate you toward your retirement goals and should be treated with great care. These types of things don’t come around often at all. By know what you’re going to do in these situations, you’ll be able to resist the emotional pull of spending it on items that aren’t part of your retirement plan. This isn’t to say you shouldn’t spend some on things other than your retirement, it just needs to be outlined in your plan so that you know exactly how much is going where so it’s more likely to happen and not disappear into the Great Void of Financial Nothingness.