Retirement planning is crucial but often neglected aspect of personal finance. Chapter 12 of The Total Money Makeover provides valuable guidance on investing for retirement. It emphasizes starting early to maximize time for compound growth, investing 15% of income, using tax-advantaged accounts like 401Ks and Roth IRAs, and proper asset allocation. With life expectancies increasing, retirements lasting decades, and Social Security’s uncertain future, proper retirement planning allows financial security and dignity. This article will summarize key takeaways from Chapter 12 on the importance of early, consistent retirement investing.
Start retirement investing early for compound growth
The key takeaway from Chapter 12 is to start retirement investing as early as possible. Thanks to the power of compounding interest and growth over long time horizons, starting in your 20s allows far smaller monthly investments to grow into substantial nest eggs by retirement age. Every year delayed represents lost compound growth that can never be recovered. For example, investing $300 per month from age 25 to 65 at 8% annual returns results in over $1 million accumulated. Waiting till 35 requires $500 per month to reach the same $1 million. The miraculous effects of compounding interest make starting early the most important factor for retirement investing success.
Invest 15% of income into retirement accounts
Chapter 12 recommends investing 15% of pre-tax income into retirement accounts like 401(k)s and IRAs. While 15% may seem high, it enables building the large nest egg required to maintain your standard of living for potentially decades-long retirements. Consistently investing 15% annually turbocharges compound growth. And tax-advantaged accounts like 401(k)s and IRAs amplify gains by deferring or eliminating taxes. The earlier you can invest 15% per year, the more impressive the results. But even starting later has tremendous benefits versus not investing at all.
Maximize 401(k)s and IRAs for tax optimization
For optimal tax efficiency, Chapter 12 advises maximizing 401(k) contributions to benefit from any employer matching. 401(k)s allow pre-tax contributions, reducing current taxable income. Any employer match is free money that can turbocharge compound growth. After maximizing 401(k)s, fully fund a Roth IRA with its tax-free growth. The combination of pre-tax 401(k) contributions and tax-free Roth growth creates a tax efficient two-pronged strategy. Always take full advantage of any tax deductions, deferrals, or credits available for retirement accounts. Reducing taxes means more capital working for you.
Develop proper asset allocation for retirement accounts
Within retirement accounts, Chapter 12 recommends specific asset allocation strategies. For 401(k)s, take advantage of any low-cost index funds available to broadly diversify across stocks and bonds. For IRAs like Roth IRAs with greater investment flexibility, allocate across 4 fund types: large-cap stocks, mid/small-cap stocks, international stocks, and bonds. This provides diversification across investment classes while positioning significant equity allocation for growth. As retirement nears, bonds can gradually increase as a fixed-income stabilizer. But equities should dominate for growth in the early retirement investing years. Proper asset allocation combines growth, income, and stability.
Chapter 12 of The Total Money Makeover offers an excellent roadmap for retirement planning success. The key principles include starting as early as possible, consistently investing 15% of income, maximizing tax-advantaged accounts, and proper asset allocation. While challenging, dedication to these principles enables building the substantial nest egg required for a financially secure and dignified retirement. Retirement planning is too critical to neglect – Chapter 12 provides the blueprint to start building your retirement investing plan today.