When it comes to retirement planning and investing, the first step in building a DIY retirement portfolio is to acknowledge and accept that you own your retirement readiness. This new paradigm of retirement security, which has steadily been changing over the past decades, implies very real mindset and behavioral changes that you will need to adopt. This can be very exciting or daunting, depending on your perspective and readiness to accept this accountability. But in truth, only you can initiate and cultivate these very tangible changes as you take on this significant task. If this sounds a bit overwhelming, here are three ways to achieve your goal to own your retirement.
- Take accountability for your financial future. Historically, employers used to offer pensions. Pensions are a type of defined-benefit plan, which gets its name from the idea that your employer provides you an income post-employment. Unlike the 401(k), your employer (and sometimes the employee) would contribute on your behalf, and your post-employment income depended on your age, length of employment and salary history. The very essence of this plan does not necessitate ownership as your employer manages this for you. This cushy situation is no longer normative, and instead the 401(k) (as well as the Individual Retirement Account) is known as defined-contribution plans. It is up to you to decide how much to contribute to the plan before retirement. This accountability also implies that you need to build the right values, financial education and sense of initiative to act now to start small to build a nest egg for yourself (and your family) by retirement. So man up – and take responsibility!
- Be financially smart on how much to contribute and invest. With the 401(k), you are empowered to decide how much you want to contribute to your plan. 401(k) regulations allow you to contribute up to a maximum of $18,000 in 2017, and the IRS just announced that starting in 2018 you can contribute up to $18,500. Unlike with a pension, where your employer would contribute on your behalf, which wouldn’t reduce your take-home pay, when you contribute your take-home pay will be lower – and this implies tradeoffs in other areas of your life. Contributing requires sacrifice today for benefits in the far-off future. On the positive side, however, if you begin to invest young (or even in your thirties), small contributions today can snowball into larger balances in the far future (thirty to forty years from now). Additionally, you will decide how to invest (as well as reduce investing costs on) those contributions in your plan. You will need to know what asset allocation works best for your age, investment goals, and risk tolerance over the long term, and the fees you are paying for those funds.
- Keep your emotions in check. Emotions can really get the best of us – in good times and in bad. But they can be the enemy of self-directed investing. Keeping your emotions in check will help you stay the course to reach your retirement investment goals. Keeping your emotions in check means not panicking when the stock market takes a nose-dive, not over-trading your investment funds on day-to-day basis, not subverting your retirement growth potential by tapping into those funds. My advice: Keep an even keel. Objective data shows that the stock market returns 8% over the long term, and even if you object – “Well look at what happened in 2008!” – within ten years the stock market has roared past its previous 2008 high. True, all investing can lead to partial and/or full loss of principal. But with a well-diversified and low-cost retirement portfolio, it’s very unlikely. And investing is not gambling. When you invest your money, you become an owner in a business (actually hundreds of businesses when you own a mutual fund) and that business wants to pay you your money back (plus more!) through new product development and improved services and operations.
I assert that becoming a DIY investor is the best route to start your retirement planning and investing. Even if after a few years of doing it on your own, and you need a financial adviser to take a second look, it’s imperative that you know what is what so that you can engage as knowledgeably as possible. A good way to get started is to check out my new book,“From Millennial to Millionaire: DIY 401(k),” where I walk you step-by-step on how to start, fund, and manage your 401(k) for long-term success. My guidance rests on a set of simple principles, which is to invest for the long term, allocate and diversify, and lower your investing expenses. Check it out now!
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Want to learn more? Pick up a copy of my book …
From Millennial to Millionaire: DIY 401(k) – 5 Do-It-Yourself Steps for the Digital Generation to Design and Manage their 401(k) on Amazon.