If you don’t want to spend your retirement living in a studio apartment and eating Spam and Ramen noodles, it’s important to take investing seriously. You don’t have to be an expert if you follow a few tips.
The first rule you should follow is to invest in a 401k at work if you have one available. It would be great to invest to the max, but that’s not realistic. What you should do, at a minimum, is invest enough to get any matching funds your employer offers, even if it means skimping in other areas, such as emergency savings. If your company matches contributions dollar for dollar up to 2 percent of your pay, then you should contribute at least 2 percent. Otherwise, you are forgoing free money.
In addition to investing in a 401k, you should also invest in an individual retirement account if you can afford to. The government lets you invest up to $5,000 annually ($6,000 if you are 50 or older) in this tax-deferred account. You can choose either a traditional IRA, in which you exempt your contributions and earnings from taxes until you withdraw them in retirement, or a Roth IRA, in which you pay taxes up front but then never have to pay taxes again, no matter how much money your investments make.
No matter what retirement accounts you invest in, you need to make sure you know what your goals are, your time frame and how much risk you are willing to accept. For example, if you are young and expect to have a guaranteed pension when you retire, you may be more willing to make risky investments in your other retirement accounts in exchange for the possibility of large returns. In this case, you would likely invest most of your money in stocks. If, on the other hand, you are nearing retirement and need your retirement accounts to fund most of your retirement spending, you would want to be more conservative, keeping more of your money in bonds and cash.
A final rule to follow when investing for retirement is to leave your money alone. Tapping your retirement accounts early (usually before age 59 1/2) not only drains your retirement savings, it can also result in a 10-percent tax penalty.