Also, on a side note that I thought was interesting. I recently watched a segment on the today show who had some financial guru. They said if you put away $200 a month starting at age 30 in a Roth IRA, by the time you are 70, it would have gained up to 1.2 million. I guess that is based on the current returns each year, which could go up or could go down. But I thought that was an interesting tidbit. A lot of 30 plus year olds may not be able to contribute that much, but it sure makes me want to invest what I can now while I am still in my early 30s.
Yep! That assumes a 10%
average return over 40 years. This is about the market average over the last 100+ years. That's history and nothing is guaranteed going forward (which is why I use 4% in my planning - especially since I'm older than you
Since you're invested for the long term you really don't care what happens year-to-year so long as the market goes up over the next 40 years. If you could put $500/mo to max out your Roth and it "
only" returned a 7% per year average over 40 years you would still get to your target. Then if the market ended up returning 10%, you'd have >$3million. Obviously, Roth wouldn't be your only investment as your salary increases. You'll have 401k, and at some point probably a 457b or 403b (similar to 401k with some different features / constraints), deferred comp, profit sharing, after tax (i.e. just going to Fidelity.com and buying funds), etc. Your commitment to starting now and continuing for the next 30+ years is what will get you to your goal.
We've given you LOTS to consider. I know it's overwhelming. It's all based on experience (some good, some bad!) and market truths and solid research. Some of it is stream of consciousness from me (and thinking of others who might read this and benefit, as well). I'll try to boil down my thoughts here...
To keep it simple:
0)
Read this: https://www.bogleheads.org/wiki/Bogleheads®_investing_start-up_kit . This is succinct and actionable.
The key to understanding is educating yourself (Boglehead's first step). Most likely you, like me, will be confused the first time you read this stuff. So, you read more and more until it starts to make sense.
But you don't wait to invest.
In your 401k and/or Roth go ahead and put your contribution in a target fund (i.e. one that is called something like Fidelity 2050 Target Fund or whatever they call it). You can change it later to be aligned with what you learn. In a retirement fund, you don't have to worry about changes requiring you to pay taxes. [In an after-tax fund (i.e. at a broker) capital gains taxes must paid.]
1) Decide
how much you are willing to invest each month. At a
minimum, contribute the 5% of your salary that will be matched at 50%.
2) Decide your "
risk tolerance." Some call this a 'sleep number' as in "what are you comfortable investing in equities (stocks) so that you can sleep at night without worrying what the market is doing." There are a bunch of theories on what the percentage should be, but the longer you have to invest (i.e. 30+ years is along time), the more your portfolio can tolerate ups and downs of the market - but this is a
personal decision! Some suggestions are if you have a high risk tolerance, then have an aggressive equity allocation: 120 minus your age (or 110 if you're moderately aggressive or 100 if you're conservative). This is the percentage of your investment that should go into stocks funds the rest in bonds. So for moderately aggressive if you're 30 then 120-30 = 90, 110-30=80 etc).
3) Decide your
asset allocation (considering your risk tolerance). If you decided to be aggressive, 90% of your monthly contributions would go into equities and 10% into a bond fund. You should also decide if you want to do international stocks. I suggest you do to get complete diversity, but some folks (Jack Bogle included) said you don't need them.
4) Decide
which funds to buy (considering your asset allocation). If you choose to do the 3-fund portfolio, your breakdown might look like below.
Here's an example of a moderately aggressive
3-fund portfolio allocation:
80% in equities: of this 70% would be in a total stock market index and 30% in a total international stock market index.
20% in bonds - in a total bond market index.
I don't know what funds you have available in your 401k/roth/etc. but if it is Fidelity Funds, then each month (or paycheck) your contribution might be allocated into these 3 funds (again depending on which specific funds are available to you and your risk tolerance).
This is based on an 80/20 split:
56% in Fidelity Total Stock Market Index (FSTMX)
24% in Fidelity Total International Stock Market index (FTIGX)
20% in Fidelity Total Bond Fund(FTBFX)
Alternatively, you could choose to keep it REALLY simple by choosing a target date fund for the year (approximately) you plan to retire. The fund manages the splits/allocations.
4)
Don't go with "whatever fund has been up the most in YTD/1/3/5/10 years". Choosing the total market path (either 3-fund or 1 target fund ) keeps it
very simple. You set it and forget it and just check it every now and then. Don't buy expensive funds. Diversify by buying the total stock and total bond market. These are usually the cheapest funds available to you. Check out the
The Callan Periodic Table of Investment Returns to understand how last year's winner is this year's loser (and vice versa) over last 20 years (and month-to-month)
5)
Stay the course! Don't worry about the market's ups and downs. 4Q has done a great job of detailing how his family approached this. Increase your investment amount as you can when you get raises, promotions, bonuses. Keep reading & learning.
6) Retire comfortably
4Q's advice regarding debt is outstanding. Wish I had considered this when I got my first real job and thought I was rich!
Also, only "worry" about the things you can control: How much you save and how much you spend.