Some people like to know all their choices. Most of us, whether we admit it or not, are overwhelmed by too many choices. I’m going to guide you through one good option to save for retirement. Might there be better options for your particular situation? Possibly. However, not saving for retirement at all is a much worse option. Start with this, and you can always tweak your plan later.
A few notes before we begin. Setting up this retirement account does require a $1000 initial contribution. After that, you can contribute as much or as little as you want (up to $5,500 per year). Also, if you are making over $100,000, please see these contribution rules. Finally, once your money is in the Roth IRA, don’t plan on accessing it until you’re retired. Withdrawing it early will cost you in penalties. So make sure your emergency fund is in place before you do this.
First head over to Vanguard to set up your account. Vanguard will take you step by step through setting up your account and funding it. Select “Retirement Account” and “Roth IRA” when prompted. Establish funding from the same bank account that you deposit your paychecks in. This way you’ll be able to set up recurring automatic contributions. Once you have established the account and online access, you’ll be prompted to select a fund to invest in. Vanguard offers a line of Target Retirement Date Funds, ranging from 2010 to 2060. Select the fund with the date closest to your anticipated retirement date.
Once you have your initial investment selected and funded, set up recurring automatic contributions. Vanguard lets you set up automatic contributions every week, every other week, twice a month, or monthly. Set the contributions to come out a few days after your paycheck is typically deposited.
Figuring out exactly how much to contribute is the hardest part. Vanguard offers a retirement calculator. Adjust the sliders to fit your situation. When all your other sliders are set, use the third slider to tell you how much you should be saving by sliding. You should have it set so that the green bar (anticipated income) on the left matches or exceeds the blue bar (needed income). This slider is the annual contribution, so you’ll need to divide it out by the number of contributions you’ll be making per year.
There’s a good chance you’ll be shocked by the amount Vanguard recommends you contribute. You might even be tempted to boost the “expected annual return rate” slider. Be careful here, because its much better to make a conservative estimate. Vanguard’s target funds have all returned somewhere between 5.5% and 6.5% annually over the last decade, so I wouldn’t move the slider any higher than that. If you can’t contribute as much as the calculator recommends, start contributing as much as you can, and work on ways to increase that contribution. Contributing something is better than nothing!
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- While I do strive to only write accurate information and dispense valuable advice, I am not a licensed financial adviser. All information is based solely on my personal experience and personal research and should be treated as such. Find out more.