A Gallup Poll indicates that the typical age for individuals to begin saving is 29, with only 26% starting before 25. However, starting to save for retirement in one’s 20s is financially more advantageous than doing so in one’s 30s or later. For example, investing $3,600 annually at age 22 with an 8% average annual return would result in $1 million by age 62. In contrast, waiting until age 32 to start saving the same amount annually would require saving $8,200 per year to reach the same $1 million goal by age 62. The table below illustrates the yearly savings required to reach $1 million at age 62, based on starting age.
| Age | Amount To Invest Per Year To Reach $1 Million |
|---|---|
| 22 | $3,600 |
| 23 | $3,900 |
| 24 | $4,200 |
| 25 | $4,600 |
| 26 | $5,000 |
| 27 | $5,400 |
| 28 | $5,900 |
| 29 | $6,400 |
The financial impact of delaying investment can be significant. For example, waiting from age 22 to 29 to start investing would require an additional $2,800 in yearly savings, assuming the same rate of return, to reach the same financial goal. This emphasizes the importance of starting to invest as early as possible, particularly after graduation.
Do you need help from Financial Advisor?
In some cases, speaking with a financial planner can be beneficial if you need assistance creating a comprehensive financial plan for your life. This may include guidance on saving, budgeting, investing, insuring yourself and your family, and creating an estate plan. It’s worth noting that creating a financial plan and paying a fee for it is different from working with a financial advisor who manages your money and takes a percentage as fee. For most young investors after college, a financial plan can be used for an extended period, and it may not be necessary to pay for ongoing management.
We believe that it is only necessary to consult with a financial planner a few times throughout your life, based on significant life events. A well-crafted financial plan should last until the next major change in your life. Some examples of such events include:
- After graduation or obtaining your first job
- Merging finances after getting married
- Having children
- Inheriting significant wealth
- Approaching retirement
- During retirement
Choosing Between a Robo-advisor or a Self-directed Approach to Investing
When it comes to investing, individuals have the option to choose between using a Robo-advisor or taking a self-directed approach. A Robo-advisor is an online investment management service that uses algorithms to automate and manage an individual’s portfolio based on their investment goals and risk tolerance. A self-directed approach, on the other hand, involves the individual managing their own portfolio, researching and selecting investments, and making trades on their own. Both options have their own advantages and disadvantages, and it ultimately depends on the individual’s level of investment knowledge and comfort with managing their own investments.
If you decide not to work with a financial advisor, a Robo-advisor may be a suitable alternative. It can be a convenient option for those who want to invest but don’t want to spend a lot of time researching and managing their portfolio. Robo-advisors automate the process of setting up and managing an investment portfolio based on an individual’s risk tolerance and goals. The system continually updates the portfolio, meaning you don’t have to actively manage it. Plus, all interactions with Robo-advisors are done online, eliminating the need for in-person meetings with an advisor.
Type Of Account To Open?
Employer Plans – 401k or 403b:
Employer plans, such as 401k and 403b, are types of retirement savings plans offered by employers to their employees.
A 401k plan is a type of defined contribution plan that is sponsored by an employer. It is a tax-deferred investment vehicle that allows employees to save for retirement by contributing a portion of their salary to the plan. Employers may also choose to match a certain percentage of employee contributions.
A 403b plan is a tax-deferred retirement savings plan that is similar to a 401k plan, but it is available to employees of public schools, tax-exempt organizations, and certain ministers. It also allows employees to save for retirement by contributing a portion of their salary to the plan. Employers may also offer matching contributions.
Both 401k and 403b plans offer pre-tax contributions and tax-deferred growth, meaning the employee will not pay taxes on the money they contribute to the plan or on the investment growth until they withdraw the money in retirement.
Individual Retirement Accounts – Roth or Traditional IRAs:
Individual Retirement Accounts (IRAs) are another type of retirement savings plan that individuals can open and contribute to on their own, outside of an employer-sponsored plan. There are two main types of IRAs: Roth and Traditional.
A Roth IRA is an individual retirement account that allows individuals to contribute after-tax dollars, which grow tax-free and can be withdrawn tax-free in retirement. This means that contributions to a Roth IRA are not tax-deductible in the year they are made, but the money grows tax-free and withdrawals in retirement are tax-free.
A Traditional IRA, on the other hand, allows individuals to contribute pre-tax dollars, which grow tax-deferred and are taxed as ordinary income when withdrawn in retirement. Contributions to a Traditional IRA may be tax-deductible in the year they are made, but the money grows tax-deferred and withdrawals in retirement are taxed as ordinary income.
Both Roth and Traditional IRA have different contribution limits, income limits, and rules for withdrawals. The choice between a Roth or Traditional IRA will depend on an individual’s tax situation, retirement goals, and other factors.
Health Savings Accounts (HSAs)
A Health Savings Account (HSA) is a type of savings account that is intended to help individuals save money to pay for qualified medical expenses. HSAs are typically paired with a high-deductible health plan (HDHP) and are available to individuals who are enrolled in an HDHP. Contributions to an HSA are tax-deductible, the money in the account grows tax-free, and withdrawals for qualified medical expenses are also tax-free. The funds in an HSA roll over from year to year and belong to the account holder, even if they change health plans or leave the workforce.
Where To Invest by yourself?
When it comes to choosing where to invest, consider factors such as:
- Low costs, including account fees and commissions.
- A wide variety of investment options, with a focus on commission-free ETFs.
- Easy to navigate the website and mobile app.
- The availability of physical branches for in-person assistance.
- Cutting-edge technology and industry innovation.
We recommend M1 Finance as a great starting point for investment. They offer a cost-effective way to build a portfolio with no fees and provide access to stocks and ETFs, automatic transfers, and more. To learn more, visit M1 Finance’s website. Additionally, we have reviewed and compared many of the top investment companies on our Best Online Stock Brokers And Invest Apps. We encourage you to explore all options and make your own informed decision.
How Much To Invest?
When considering how much to invest after college, it’s important to understand that there is no one-size-fits-all answer. However, one strategy to consider is “front-loading” your savings by putting away as much as possible early on in your career. This can help you have a more comfortable later in life.
To implement this strategy, make saving and investing a priority by setting aside funds before other expenses. You can also increase your savings by challenging yourself to save an additional $100 each month. This can be achieved through budgeting or by earning extra income through a side hustle. Keep in mind, “saving until it hurts” may require short-term sacrifices for long-term financial stability.
Try to Achieve these goals:
Reach the maximum contribution limit for your IRA: $6,000 annually or $500 monthly Achieve the maximum contribution limit for your 401k: $20,500 annually or $1,708 monthly Maximize your HSA contribution (if eligible): $3,650 annually for individuals or $7,300 annually for families If you have additional income from a side hustle, consider maximizing your SEP IRA or Solo 401k contributions.
Investment Allocations In the 20s
Choosing where to invest can be intimidating, but it is an essential part of building a successful investment portfolio. One effective strategy is to create a diversified portfolio of exchange-traded funds (ETFs) that align with your risk tolerance and investment goals.
Asset allocation is a method of distributing your investment funds in a way that aligns with your risk and goals. It should also be easy to understand, low-cost, and simple to manage.
One popular approach is to use Boglehead’s Lazy Portfolios, which are a set of pre-defined portfolios based on risk tolerance and investment goals. We recommend M1 Finance for building these portfolios as it is easy to use, commission-free, and can quickly and easily create portfolios. Additionally, take a look at commission-free ETFs that offer similar investments at low cost.
Conservative Long-Term Investor:
| % Allocation | Fund | ETF |
|---|---|---|
| 40% | Vanguard Total Bond Market Fund. | BND |
| 60% | Vanguard Total Stock Market Fund. | VT |
Moderate Long-Term Investor:
| % Allocation | Fund | ETF |
|---|---|---|
| 40% | Vanguard Total Bond Market Fund. | BND |
| 30% | Vanguard Total Stock Market Fund. | VT |
| 24% | Vanguard International Stock Index Fund. | VXUS |
| 6% | Vanguard REIT Index Fund. | VNQ |
Aggressive Long-Term Investor:
| % Allocation | Fund | ETF |
|---|---|---|
| 30% | Vanguard Total Stock Market Fund. | VT |
| 10% | Vanguard Emerging Markets Fund. | VWO |
| 15% | Vanguard International Stock Index Fund. | VXUS |
| 15% | Vanguard REIT Index Fund. | VNQ |
| 15% | Vanguard Total Bond Market Fund. | BND |
| 15% | Vanguard TIPS. | VTIP |
You just have to invest to reach a million.
