For Connor and Allison McGee and their 16 month-old son Jack, retirement is a long ways off. But the 20-something McGees know they should be looking ahead.
Were kind of planners, said Allison McGee. And even already, even though were in our mid-20s, I already worry that were not currently really working toward retirement.
But they face obstacles and fears that keep many millennials and generations before them from saving for a future 40-plus years down the road.
A study published by BankRate.com found that half of all Americans do not own any stock, including 401(k)s with stock options. Only 26 percent of millennials own any stock, which is roughly half of the national average, according to the study. The two main reasons for the reluctance to invest are a lack of funds and a lack of understanding how to invest.
According to McGee, the couple has a lot of expenses racked up between school, their son, saving for education and trying to amass enough for a down payment on a house. These expenses make it difficult for them to put additional money away in retirement savings.
But financial advisers say it doesn't take much in the way of resources or knowhow to begin reaping rewards from investing early and consistently.
Below are seven things first-time investors should consider when saving for retirement.
1. Start soon
When asked to rate their financial priorities, retirement savings came in seventh place for the McGees.
But Allison McGee said those priorities will change eventually.
"I think its kind of a short-term kind of thing and itll probably sneak back up there, but right now thats probably true. It probably is last," she said.
As the BankRate survey implies, many Americans do not make investing a priority, and it's costing them big bucks in the long-term.
The way compound interest works, those who start in their 20s with investing small amounts over a long period will be better off at retirement than if they start late and play catchup with setting aside large sums in savings. This link to finance guru Dave Ramsey illustrates the power of compounding interest.
"I think that the end result of investing is retirement. Youre trying to build that nest egg and its important to be diversified and think about that possibility as youre looking at your savings," said Sarah Holden, senior director of Retirement and Investor Resources for the Investment Company Institute. "Especially if youre younger, the sooner you start, the longer it can compound for you."
2. Retirement savings accounts
At Connor McGees last job, the company gave employees the option to put up to 5 percent of their salary in a 401(k) retirement account where the company would match dollar for dollar. The social media marketing firm where Connor works now, however, doesn't offer that benefit.
So, they took the money from the earlier 401(k) and rolled it into an individual retirement account, or IRA, where it can continue to grow and avoid tax penalties for tapping into retirement funds too early. Connor is in the process of applying for an air traffic controller position, which would likely offer a similar employee savings benefit.
Financial advisers recommend first-time investors consider employer-offered savings plans or an IRA as their initial step in investing. They can be set up with automatic withdrawals from your paycheck or bank account.
3. Keep it simple
A comprehensive knowledge of securities isn't necessary to begin investing.
The financial industry tries to make it complicated, and there are some complicated investments out there. Once youre dealing with millions youre talking about hedge funds and private equity funds," said Thomas Fritz, vice president of Wilson Financial Advisors. "But the average investor, you dont need to know all of that stuff.
He recommends first-time investors consider mutual funds, which are combinations of stocks, bonds and other investments that are packaged together to reduce risk and take advantage of certain markets, such as foreign companies, high-growth start-ups, long-standing corporations or municipal bonds.
So we all put our money together in a fund, we have a professional who then selects the stocks or the bonds or whatever the investment category is for the group of us to invest and it earn returns that then get sent back to us, said Holden.
Investopedia explains how different types of mutual funds distinguish themselves by containing different mixes of various securities.
We have never bought individual stocks or bonds or anything like that, said McGee. I think were sort of like, really scared of risk. I think we just mostly end up going with mutual funds.
4. Management fees
Different types of mutual funds will produce larger or smaller gains. However, there are other factors that determine a profitable investment, such as fees charged to those buying into a mutual fund.
What makes a much bigger difference is expenses, and thats what we try to tell people, said Fritz. If you pay half a percent or 1 percent more (than another fund charges), all things being equal, you fall behind very quickly.
Companies like Vanguard and Morningstar examine and rank thousands of mutual funds. Morningstar rates mutual funds on a scale from one to five stars based on the quality of the fund, rate of return and estimated risk of investment. Index funds typically charge the lowest management fees.
According to Fritz, low management fees can make less-expensive, lower performing three-star mutual funds as profitable as a high-cost five-star fund.
5. Purpose for investing
According to Fritz, there are two reasons why one should invest, and that will determine what types of mutual funds to purchase.
If somebody comes to me in their 20s or 30s or whatever, the first thing I ask is, Is this retirement money or not retirement money, said Fritz. Thats basically the big distinction, so if its retirement money, then by definition its long-term.
According to Fritz, if investors are in for the long haul, they should look at mutual funds with a higher percentage invested in the stock market.
Over five years, the stock market rises every 4 out of 5 years statistically, said Fritz. So you have an 80 to 20 percent chance of making money in five years, if you invest in stocks. And in 10 years, its about 95 percent to 5 percent and in 20 years, its virtually guaranteed that you make money.
If someone wants to invest their money for the short-term, like a down payment for a house, Fritz recommended that people either leave their money in a bank CD, a short-term fund or simply leave it in their bank account.
6. Look for a support system
When you get lost and confused reading through financial filings and listening to investment bloggers and other talking heads, turn to a friend or adviser you trust.
My dad is somebody who I know knows a lot about stocks in particular, said McGee. If I have a hard time understanding what were getting into and how to go forward with it, I know that Im planning on talking to him about it because I know that its something that hes been through multiple times.
Raphael Pak, a financial analyst for the student-run fund manager Brigham Capital, created the fund as a way to meet with investment-minded students. They pooled $1,000 each to invest and when they meet they talk about various investment opportunities and jointly decide how they want to invest their money as a collective.
Jane Nelson, Rocky Mountain Chapter director of the BetterInvesting Club, first got involved with the group after her husband died. She felt the need to better understand what her account was doing with her money.
And so when somebody invited me to join an investment club, I jumped at it, said Nelson. Within a year that gave me the confidence and the knowledge to talk to the brokers and the accountants that we already have. For example they proposed something, then I could say, OK Ill think about it, instead of just saying, Yeah, OK, do whatever you want.
7. Beware of fraud
The McGees manage their own investments in their IRA. However, past events such as the recent recession have tainted Allisons confidence in the investment banking system and the economy.
"I just think what if I had 10 percent of my net worth in this one company and it just blew up and basically was worthless," she said.
Such skepticism isn't a bad thing when so much is at stake.
If I mugged you and stole your wallet, I steal the $100 that you got in your wallet, said SEC director of the Office of Investor Education and Advocacy Lori Schock. But if I steal that 401K plan that youre rolling over, you lost not everything that you earned in the past but thats also your future. Thats money thats supposed to sustain you for the rest of your life.
With so much at stake, investors need to be aware of fraudulent investments that look too good to be true.
According to Schocke, one way to guard against investment fraud is make sure that all the advisers, brokers and investments you work with are registered with the federal Securities and Exchange Commission. The SEC online database, called Edgar, can help investors confirm whether a mutual fund or financial adviser is registered.
There are other ways to reduce risk and avoid fraud beyond checking with the SEC:
If you feel pressured to invest in something you don't fully understand, avoid it.
Trust your instincts. If something doesn't feel right, then don't do it.
Beware of affinity fraud, when someone uses their position of trust and authority in the community to gain access to people's money. Never invest based solely on friendship, family ties or a social relationship such as church.
Were kind of planners, said Allison McGee. And even already, even though were in our mid-20s, I already worry that were not currently really working toward retirement.
But they face obstacles and fears that keep many millennials and generations before them from saving for a future 40-plus years down the road.
A study published by BankRate.com found that half of all Americans do not own any stock, including 401(k)s with stock options. Only 26 percent of millennials own any stock, which is roughly half of the national average, according to the study. The two main reasons for the reluctance to invest are a lack of funds and a lack of understanding how to invest.
According to McGee, the couple has a lot of expenses racked up between school, their son, saving for education and trying to amass enough for a down payment on a house. These expenses make it difficult for them to put additional money away in retirement savings.
But financial advisers say it doesn't take much in the way of resources or knowhow to begin reaping rewards from investing early and consistently.
Below are seven things first-time investors should consider when saving for retirement.
1. Start soon
When asked to rate their financial priorities, retirement savings came in seventh place for the McGees.
But Allison McGee said those priorities will change eventually.
"I think its kind of a short-term kind of thing and itll probably sneak back up there, but right now thats probably true. It probably is last," she said.
As the BankRate survey implies, many Americans do not make investing a priority, and it's costing them big bucks in the long-term.
The way compound interest works, those who start in their 20s with investing small amounts over a long period will be better off at retirement than if they start late and play catchup with setting aside large sums in savings. This link to finance guru Dave Ramsey illustrates the power of compounding interest.
"I think that the end result of investing is retirement. Youre trying to build that nest egg and its important to be diversified and think about that possibility as youre looking at your savings," said Sarah Holden, senior director of Retirement and Investor Resources for the Investment Company Institute. "Especially if youre younger, the sooner you start, the longer it can compound for you."
2. Retirement savings accounts
At Connor McGees last job, the company gave employees the option to put up to 5 percent of their salary in a 401(k) retirement account where the company would match dollar for dollar. The social media marketing firm where Connor works now, however, doesn't offer that benefit.
So, they took the money from the earlier 401(k) and rolled it into an individual retirement account, or IRA, where it can continue to grow and avoid tax penalties for tapping into retirement funds too early. Connor is in the process of applying for an air traffic controller position, which would likely offer a similar employee savings benefit.
Financial advisers recommend first-time investors consider employer-offered savings plans or an IRA as their initial step in investing. They can be set up with automatic withdrawals from your paycheck or bank account.
3. Keep it simple
A comprehensive knowledge of securities isn't necessary to begin investing.
The financial industry tries to make it complicated, and there are some complicated investments out there. Once youre dealing with millions youre talking about hedge funds and private equity funds," said Thomas Fritz, vice president of Wilson Financial Advisors. "But the average investor, you dont need to know all of that stuff.
He recommends first-time investors consider mutual funds, which are combinations of stocks, bonds and other investments that are packaged together to reduce risk and take advantage of certain markets, such as foreign companies, high-growth start-ups, long-standing corporations or municipal bonds.
So we all put our money together in a fund, we have a professional who then selects the stocks or the bonds or whatever the investment category is for the group of us to invest and it earn returns that then get sent back to us, said Holden.
Investopedia explains how different types of mutual funds distinguish themselves by containing different mixes of various securities.
We have never bought individual stocks or bonds or anything like that, said McGee. I think were sort of like, really scared of risk. I think we just mostly end up going with mutual funds.
4. Management fees
Different types of mutual funds will produce larger or smaller gains. However, there are other factors that determine a profitable investment, such as fees charged to those buying into a mutual fund.
What makes a much bigger difference is expenses, and thats what we try to tell people, said Fritz. If you pay half a percent or 1 percent more (than another fund charges), all things being equal, you fall behind very quickly.
Companies like Vanguard and Morningstar examine and rank thousands of mutual funds. Morningstar rates mutual funds on a scale from one to five stars based on the quality of the fund, rate of return and estimated risk of investment. Index funds typically charge the lowest management fees.
According to Fritz, low management fees can make less-expensive, lower performing three-star mutual funds as profitable as a high-cost five-star fund.
5. Purpose for investing
According to Fritz, there are two reasons why one should invest, and that will determine what types of mutual funds to purchase.
If somebody comes to me in their 20s or 30s or whatever, the first thing I ask is, Is this retirement money or not retirement money, said Fritz. Thats basically the big distinction, so if its retirement money, then by definition its long-term.
According to Fritz, if investors are in for the long haul, they should look at mutual funds with a higher percentage invested in the stock market.
Over five years, the stock market rises every 4 out of 5 years statistically, said Fritz. So you have an 80 to 20 percent chance of making money in five years, if you invest in stocks. And in 10 years, its about 95 percent to 5 percent and in 20 years, its virtually guaranteed that you make money.
If someone wants to invest their money for the short-term, like a down payment for a house, Fritz recommended that people either leave their money in a bank CD, a short-term fund or simply leave it in their bank account.
6. Look for a support system
When you get lost and confused reading through financial filings and listening to investment bloggers and other talking heads, turn to a friend or adviser you trust.
My dad is somebody who I know knows a lot about stocks in particular, said McGee. If I have a hard time understanding what were getting into and how to go forward with it, I know that Im planning on talking to him about it because I know that its something that hes been through multiple times.
Raphael Pak, a financial analyst for the student-run fund manager Brigham Capital, created the fund as a way to meet with investment-minded students. They pooled $1,000 each to invest and when they meet they talk about various investment opportunities and jointly decide how they want to invest their money as a collective.
Jane Nelson, Rocky Mountain Chapter director of the BetterInvesting Club, first got involved with the group after her husband died. She felt the need to better understand what her account was doing with her money.
And so when somebody invited me to join an investment club, I jumped at it, said Nelson. Within a year that gave me the confidence and the knowledge to talk to the brokers and the accountants that we already have. For example they proposed something, then I could say, OK Ill think about it, instead of just saying, Yeah, OK, do whatever you want.
7. Beware of fraud
The McGees manage their own investments in their IRA. However, past events such as the recent recession have tainted Allisons confidence in the investment banking system and the economy.
"I just think what if I had 10 percent of my net worth in this one company and it just blew up and basically was worthless," she said.
Such skepticism isn't a bad thing when so much is at stake.
If I mugged you and stole your wallet, I steal the $100 that you got in your wallet, said SEC director of the Office of Investor Education and Advocacy Lori Schock. But if I steal that 401K plan that youre rolling over, you lost not everything that you earned in the past but thats also your future. Thats money thats supposed to sustain you for the rest of your life.
With so much at stake, investors need to be aware of fraudulent investments that look too good to be true.
According to Schocke, one way to guard against investment fraud is make sure that all the advisers, brokers and investments you work with are registered with the federal Securities and Exchange Commission. The SEC online database, called Edgar, can help investors confirm whether a mutual fund or financial adviser is registered.
There are other ways to reduce risk and avoid fraud beyond checking with the SEC:
If you feel pressured to invest in something you don't fully understand, avoid it.
Trust your instincts. If something doesn't feel right, then don't do it.
Beware of affinity fraud, when someone uses their position of trust and authority in the community to gain access to people's money. Never invest based solely on friendship, family ties or a social relationship such as church.