Market Beat: Starting your investment portfolio
April 25, 2017
One of the best ways to have a secure retirement is to start investing as soon as you can. By starting early, you will give your funds more time to compound.
If you have access to an employer-sponsored retirement plan at work, like a 401K, take advantage of that, especially if your employer matches your contributions. Your goal should be to fund your retirement account at least up to the maximum amount that your employer will match, that way your money is doubling before it begins earning investment returns. If you don't have a retirement plan at work, set up an IRA, individual retirement account. A qualified retirement account will provide tax deferral that will help your long-term results immensely.
A good starting point is to set up a budget to see how much you can save. Identify and separate essential and nonessential purchases. Try to save money on your essentials and eliminate some nonessentials. Essential items are things like food, shelter, clothing, and of course a ski pass at your favorite local resort. Nonessentials include purchases like dining out, brand new cars and other things that you might enjoy but can do without.
Once your budget is set up and you have figured out your cost of living, you'll need to estimate the effects of inflation on your future expenses. Inflation can erode your purchasing power over time, long-term investors need to invest some funds into asset classes that have the potential to grow greater than or equal to the inflation rate. Low-cost index funds are a good starting point for first-time investors.
You'll need to think carefully about the number of years you'll work before you can retire. A 25-year-old that is planning to work until normal retirement age, 65, has forty years for their investments to grow. Starting early is very important for the long haul, especially if you want to retire earlier than age 65. It will be difficult to retire early if you get a late start on your investing.
One way to estimate your income needs in retirement will be to use your current budget with an inflation adjuster, then figure out how much you'll need to save. A couple of excellent and free resources for planning are at paulmerriman.com and centsai.com, both websites are extremely educational. One of the keys to successful planning is to educate yourself.
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Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.