Learning to invest for retirement shouldn't be scary, confusing or make you have a panic attack.
As women we can start investing for retirement, feeling confident and empowered. In this article I am going to cover some of the biggest challenges we face, how to counter them and how to get your first account set up.
I have been investing for over 30 years, I started in the 6th grade and love sharing my experience with other women.
So, let's dive right in and learn why you should be investing!
Challenges Women Face When Investing
When women decide to invest, there are more challenges than just knowing how to invest. There are life factors that impact how much we need to save. And at the same time society factors that make having anything left to save even harder.
In this section I am going to cover the four biggest issues. So, you can be aware of them, and plan around them.
Now that I have depressed you, let’s talk about the solutions to these.
Personal Finance Basics for Successful Retirement Savings
Before you can think about investing, you must make sure your finances are healthy. Without these, it will make it harder for your investing to be successful. I will cover two areas that are important, and one question that I get frequently!
To invest money, you have to have extra money. Budgeting is the best way to do this. This is how you manage all those extra costs of being a woman! I am not going to go too deep into how to budget, that can be an entire class! (Which I am working on!) Instead, I am going to share with you a few tips to get started.
What budgeting is not: a fixed system that tells you what to do.
What a budget is: a plan that you set up to ensure you spend your money on the things that matter most to you.
To get started with a budget:
- Gather data from the past couple months, so that you know what your expenses look like. If you prefer to gather as you go and then create one, this works too.
- Begin allocating your income out to expenses. Start with your fixed expenses that are the same every month. Then add in your discretionary expenses. These are where you can adjust to make sure that you have enough to save each month.
- Track your progress during the month to make sure you are on track and not missing your goals.
- Review monthly for any adjustments that you need to take.
Budgeting takes a while to get used to, so make sure that you give yourself time to master it. It is a learned skill like many other things that you do.
Emergency funds are a necessary step before investing. Because without extra emergency money you may end up tapping into your savings. Removing any benefits of starting to save.
You don’t want to put any money in the stock market you need in the next five years. The stock market is too unpredictable for you to put money you need soon in there. It really is a place for longer term savings.
Open a separate saving account at your bank. Then start putting money away for those emergencies that come up!
Should I Invest or Pay Off Debt First
This question comes up a lot! My answer is a little more in the grey area than most financial experts. And that is:
This is about balancing goals and matching your personality. It will depend on your personal life circumstances and what you want. We are all unique.
With that said, I do encourage people to at least start investing a little bit into retirement. Why? Because of the benefits of compounding are so great, that you want to start ASAP. Especially women, since we need to save more and have a shorter amount of time to do it, we need our money to be working for us. You will be better off having started some retirement savings in your 20's, then to do nothing till your 40's.
On the flip side, if you have credit card debt that is costing you 24%. Then your investing will struggle to keep pace with making more than your debt is costing you. You absolutely want to tackle that debt.
Those in between interest rates, where your student loan is 5%. Or your car is 7%. This is when it really is a personal preference. You can do both save and pay off debt and be fine.
If you come into a lump sum of money and are not sure how to allocate the money, check out this article on What to do with a lump sum of money.
Before we dive into how to start investing, I want to share with you three tips.
Start As Early As Possible
The number one way to overcome the challenges we face as women is to start early. Why? Because one of the best tools available to us is the compounding effect. This is the growth that comes over time from reinvesting what you earn from your initial investment. Example: You buy a share of Starbucks. They pay a dividend, and you reinvest it. That buys you more shares. This increases the value of your investment and increases the dividend you receive.
Invest more than you think
Contribute more than you think you will need. Especially when you have excess money. You never know what your financial situation will be in the future, so putting away when you have the money is a great plan. I recommend 15 - 20% into retirement savings.
Don’t shy away from risk. As women we tend to prefer more security. But the more security we move towards, the more we must put away. This doesn’t mean go crazy risky, but you need a heavy position in stocks. Especially the younger you are. Studies have shown we are better at investing than men, and this risk/security balance is one of the reasons. (For more on asset allocation)
Stay in the know
Don't let other people run your money without you being in the know. You don't need to turn into a financial expert. But you do need to know the basics. If you turn over control to someone, even a spouse, and something happens you will struggle. Not just to get all the information you need, but it can be a big emotional hit. Dealing with loss and needing to learn about money at the same time is never a good mix.
How to Start Investing
I am going to focus on accounts that are outside of your work and are focused on retirement. I do however believe you should be using any access to 401K’s or similar plans that you have. Also putting some money aside in taxable accounts. Thus, if you want to buy a house or take a break from work for a while, you have funds available without penalty.
Types of Retirement Investing Accounts
There are two main accounts that we will cover. There are other options if you are self-employed, but we will focus on the ones that are available to almost everyone.
- Traditional IRA
- Roth IRA
Both are accounts that you open with a brokerage company to save for retirement. They are similar in how much you can put in them each year. They differ in taxability and income eligibility. I recommend talking with a tax professional or investment advisor to get specific advice on what will work best for you. But here are the basics:
- Money going in: on a Traditional IRA it is not taxed today, but when you withdraw it in retirement. Thus, giving you a tax break today, but to a certain income level. On a Roth you pay taxes today, but don’t pay taxes on the money you withdrawal in retirement.
- Eligibility: There are limits on both. With the IRA the limits are on how much you can take off your current taxable income. You may end up with non-deductible contributions. The Roth has income caps where you can’t contribute. However, you can roll over your non-deductible contributions in a traditional. This is called a back door Roth. (2022 note: This has been up for debate in congress for changing the rules - so always talk to a tax professional before doing!)
These limits and requirements change every year and are impacted by your filing status. So, make sure you know what the current rules and limits are. I know I said this before, but I highly recommend finding a good tax person and staying with them!
Also, the IRS actually has great information on their site, and they keep it up to date with new information! IRS Retirement Plans Information
Final note about these retirement accounts. If you are a stay-at-home mom, you can still open and fund an IRA. As long as your spouse has earned income to cover both of your contributions, you can invest. This is called a spousal IRA but is set up as a traditional or ROTH. The spousal label is just to signify that you don't need the income if your married partner has it. You don't have to tell your investment company it is a spousal IRA. That is for the actual tax forms at tax time!
Steps to Start Investing
This is where investing is much simpler than you think. In a very short amount of time, you can be up and running.
Select a Brokerage Company
This is a company where you can buy and sell stocks and other investments. Look for what their minimums are and what the fees are. But for the most part, they are all very similar. In my experience the difference is in the customer service. I recommend picking one that allows you to grow as your money does. Transferring accounts is a hassle, so think long term when picking.
Set Up The Account
There should be a very easy online set up process to get started. Fill out the forms, transfer money in and you are set. If you are struggling with the website, first make sure you still want the company. And if you do, give them a call.
Select Your First Investment
I recommend you start with index funds or ETF's. This will allow you to be diversified and not have to know how to pick your individual investments. Indexing is where you buy every stock! So, you get market return with low fees. I also recommend that you set up a regular withdrawal for new purchases, so you are investing on a regular basis.
Reinvest dividends. Make sure that you are having dividends that you receive automatically reinvest into more shares. There should be a default setting that allows you to choose all new investments have the dividends reinvested. If you can't find it either call the company or open the chat box.
Congratulations! You are now investing for your retirement!
Need help setting goals for retirement and your money?
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