When and How to Start your Retirement Planning

When should I start my retirement planning?

The quick and simple answer is as soon as possible. Retirement planning provides various advantages, ranging from providing a financial peace of mind, covering for your bills and expenses post-retirement, and leaving a family legacy. These are some of the many incentives that you should take full advantage of retirement planning.

For example, a Roth IRA provides a TAX-FREE advantage. More specifically, in a Roth IRA account, you invest with earned income that is already taxed, and in exchange, there will be no taxes due for all your profits on your investments. This is important to understand because you are paying taxes upfront while enjoying 100% of profits as you withdraw them after retirement.

This tax advantage is the reason why you should start investing for your retirement as soon as possible. However, do keep in mind that your contributions to retirement plans should only come from your earned income. For more information on this, be sure to check out the “How to Retire in Style” article.

How should I start my retirement planning?

Aside from everything else mentioned in previous articles, one of the easiest and most popular ways to start investing in your retirement account is to buy exchange-traded funds (ETFs) or mutual funds. These funds track either an index (SPY tracks the S&P 500 index), an industry (USO represents the U.S. Oil Industry), or a sector (ITA represents the U.S. Aerospace & Defense) as a whole.

One advantage of ETFs or mutual funds is diversification, which means spreading your investments across different companies. When you invest in a share of SPY, you are essentially “buying” the S&P 500 index, which consists of 500 of the largest companies in America. This allows you to invest in a wide range of assets and companies while spending a reasonable amount, providing a safer investment, and limiting potential losses. However, this can also lead to a disadvantage because diversification can limit your potential gains. If a hypothetical stock, Stock A, grows by 30% while an ETF or a mutual fund only grows by 25%, it is obvious that investing in Stock A is a better option. Thus, many individuals, like Warren Buffet, argue that putting all your eggs in one basket is better when you know what you are doing.

So, what does it mean by “when you know what you are doing”? This means to pick a specific stock or investment that will outgrow the ETF or mutual fund. A good way to achieve this is to read news or articles online and perform further research to identify these investments. As a general rule of thumb, it’s better to look into more established companies, such as Apple, Microsoft, Google, Nvidia, Amazon, and more.

To summarize, there is no rule in defining how a “perfect” retirement account portfolio should look like. It depends heavily on personal preferences, willingness to take risks, time and effort invested, and more. As subjective as this might seem, one safe and simple way to begin is to invest in mutual funds or ETFs, before adding in other investments after further research.