The Simplest Way to Start Investing for Retirement
We’ve all seen the redundant headlines. “5 Easy Ways to Cut Spending for Retirement” or “Here are 3 Life Hacks to Help you Build your Wealth” are mainstays of the clickbait-fueled financial media. We just found out today that the guy who won’t spend $2 on coffee apparently spends $1000 on food a day. What a world.
I promise this is not a clickbait article. I hope anyone reading gets some great insight on how to save on fees and taxes when trying to build their nest egg. I’m also not going to try and tell you how to save; that can come in a myriad of ways and works differently for everyone. You just need to start saving a minimum of $100 a month (or more, if you can).
Once you’ve achieved this small hurdle of saving $100 a month, it can be extremely confusing and honestly disheartening for a beginner to try and invest their money. For those not into investing, but just wanting to put their money to work, here are three simple, easy-to-follow steps to start saving for retirement:
Open a Roth IRA with the online brokerage firm Schwab. Why a Roth IRA? Because long-term capital gains in these types of accounts are tax-free. That means, when you start pulling your money out at age 60, the government can’t touch any of it (for more comprehensive info on Roth IRAs, click here). Why Schwab? Because if you invest in their ETFs, the commission fees are zero (click here to open an account with Schwab).
Schedule a monthly transfer of $100 to the account. Like I talked about in the introduction, the hardest part about this step is finding $100 to save every month. But once you commit to it, this step becomes very easy.
Buy the max amount of shares of the Schwab Broad Market ETF (ticker: SCHB). This is a method called dollar-cost-averaging and is probably the least time consuming out of all investing strategies. All you have to do is buy shares every month, no matter the price. Why the SCHB ETF? One, because it gets you exposure to the entire U.S. market. And two, because its expense ratio is 0.03%, which is practically zero. This means since you will be paying no taxes on capital gains and no commission fees, that you only have to pay 0.03% on your account annually. Sounds like a damn good deal to me.
How has this Method Done in the Past?
If we do a quick backtest on Portfolio Visualizer, over the last 40 years (July 1979 to July 2019), dollar-cost-averaging $100 into the U.S. stock market would have turned into over $1 million today. And that’s from saving only $100 a month! Just think how much you could save if you put $200 or even $500 away.
Inflation-adjusted returns are only about $300,000, which is still impressive considering how little money is being put into the portfolio. Now, we also have to take into account that starting in 1979 and ending in 2019 was a pretty ideal time to be an investor. Can I guarantee that investing from 2019 to 2059 will produce the same results? Not by a long-shot. But I can guarantee it does better than keeping the money in a low-interest savings account, with the same amount of effort.
Disclosure: The author is not a financial adviser, and may have an interest in the companies talked about.