There is more than one way to skin a cat, as they say and that same logic applies to setting up a retirement plan. For those of you just starting to think about this topic as well as those that just haven’t gotten around to doing anything about it, there is a simple way to get the ball rolling. To many people the topic of stocks and bonds is mind numbingly boring and the idea of setting up a retirement plan sounds worse still. Well, have I got a solution for you! In fact, if you take the three steps outlined below, you will be doing better than the vast, vast majority of the American public. Not only that, but almost everyone that has a financial plan does at least two out of three of these steps within their plan. Now don’t get me wrong. Sitting down and setting up a plan has many advantages that I will not get into here. Additionally, depending on one’s circumstances, the ideas below may not be the best fit. But as a general rule these are three simple things that you can do to help yourself without having to do lots of research or sit down for a bunch of meetings with a potential advisor.
1.) Sign up for your 401K and invest at least the amount that gets you the maximum matching contribution. This is literally free money, or if you prefer to look at it another way, it is compensation that your company is willing to pay you in exchange for the job you are doing. And you are turning it down. By not participating fully in your 401K you are not allowing them to pay you what is owed to you as part of your employment. Many companies have a matching program that maxes out at a certain level. So, for example they may match your first 6% dollar for dollar or maybe 50 cents on the dollar. By not participating fully, you are saying no thank you to potentially thousands of dollars…per year. On top of that a 401K is a great vehicle to invest in. All of your money accumulates tax-deferred and you invest pre-tax. What that means is that if you made say, $50,000 a year and elected to put in 6% of your salary into your 401K, or $3,000. But since that is pre-tax dollars the money difference in your paychecks will only be $2,400 (or probably less depending on your bracket for that particular tax year). Assuming that the company matches then you will have a total of $6,000 invested after one year in exchange for your out of pocket “expense” of $2,400 or less. You don’t need to be a financial planning expert or mathematical genius to know that that trade is a fantastic deal. What to invest in with the money is important of course, but not more so than getting the money in the first place!
2.) Do the same thing with an IRA. This one is not as pressing as the 401K as there is no “free” money involved. But IRA’s have the same tax-deferred characteristics as the plan with your employer and the money also goes in pre-tax. Note: for some people a Roth IRA may be a better solution, but for most people you can’t go wrong either way. If you just want to keep it really simple then start off with a regular IRA. Like anything else, once you start down the path with investing in an IRA and 401K, you will probably find that your interest is piqued at least a little. Once that happens, you may find yourself researching investment options rather than relying solely on the advice from the guy at the next cubicle over. But the important thing is to get started. The rest usually takes care of itself as time goes by.
3.) This last step is definitely not applicable to everyone, but it is a simple one that does have some benefits. Pay down your mortgage early or at the very least do not borrow against the equity. Now with tax advantages involved in having a mortgage this one may be best done using time value of money calculations and other similar tools. But as with the Roth vs. regular IRA the math is not the most important point. Most people want to pay off their house more than anything. And a paid-for house is certainly something to be proud of especially these days. Additionally, once the house is paid off (or nearly so) many people just naturally gravitate toward investing and have more of an interest in getting a retirement plan going. And let’s not forget the obvious: paying off the mortgage just feels good.
Follow those three steps and you will end up with assets in the tens if not hundreds of thousands of dollars in a relatively, well, medium period of time and as a cherry on top your house is yours free and clear. It’s never too late to start with the above ideas (although investment choices inside the plans may differ as you get older, of course). And it can all be done with without so much as a hint of a “retirement plan.”