When one doesn’t grow up affluent, they usually get really crappy money advice. Kids hear all the time that you have to save for retirement, but most of that advice surrounds poor savings and investment choices. In addition, the advice either falls into the “Strike it Big” category or the “Play it too Safe” category. The first one will result in nothing saved in retirement and the latter will result in not enough saved for retirement, but for well-intentioned reasons. Let us look at both approaches.
Strike it Big!
I like to call this one the Redneck Retirement Plan. You play the same lottery numbers every day for 30 years and through a complete misunderstanding of probability and statistics, you might win $100,000. Alternatively, you hear about the stock market and decide to pick the next Google, Amazon, or even better, Bitcoin, and turn $100 into $1,000,000. You can retire on that, right?
If this worked, we wouldn’t have poverty in America, and we wouldn’t be crying over raising the retirement age for Social Security recipients. The probability of picking the next big technology company is close to the probability of winning the lottery: almost zero. Should we play it safe, instead?
Playing it too Safe
One of my earliest investment memories is calling Fidelity to discuss the FDIC coverage of my Roth IRA account. Upon learning that the federal government doesn’t insure investment accounts (I was a little young and naïve, sue me), I felt that I had signed up for an online scam. I talked to my middle aged coworkers to discover the wonderful land of Certificates of Deposit (CDs). They have a guaranteed return with FDIC insurance! There’s no way to lose! I can use these to retire!
Pump the brakes, soldier. Yeah, you can’t lose anything, but you can’t make anything, either. A quick google in September 2019 shows that CDs are paying out a whopping 2.30% to 2.45%. The inflation rate in 2018 was 2.44%! That means I would’ve broken even!
Furthermore, the return on this would mean I would have to save 50% of my income for 30 years just to get the pleasure of living off that same 50% of my income, adjusted for inflation, for another 30 years. This is a garbage deal. Retirement accounts need growth.
The Solution
Saving 50% of your income is admirable. In my opinion, it’s a very good strategy for setting yourself up for having a solid retirement at an early age. Where do we get the growth we crave, though? We must invest our money to get the proper returns.
A number of asset classes are available that will produce a return that you can build upon and retire on. If you’re branching out into investing into stocks, bonds, real estate, or some other investment choice, make sure you do your research. Because the risk of losing your capital is so great with more specific investing, I recommend taking 12 to 24 months to educate yourself on the risks and benefits of those techniques.
The easiest way to get those returns is putting your savings in the Thrift Savings Plan (TSP). There we have access to a number of funds that have produced returns much larger than 2-3% a year for several decades. The C fund has boasted over a 10% yearly return since 1989. If you feel stocks are too risky, look at the F fund, which has produced a solid 5-6% return since it began several decades ago. Finally, if you don’t want to think about it, you can throw your cash into a Lifecycle fund in TSP and forget it exists.
If you don’t have a TSP, go to MyPay and set it up today. Follow the prompts on the screen to start your contributions. If you’re worried about missing the money, start at 3%. You won’t miss the six pack, I promise.