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Investing Basics: How to Save for Retirement

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

A successful retirement plan is like the moon — always present and requiring lots of thought to reach. Unfortunately, many Americans today appear woefully unprepared to save enough money to enjoy any sort of retirement worthy of the name, with a recent Fed report finding 25% of non-retirees lack any sort of savings at all.

We can’t promise to lay out a detailed blueprint for how to reach your retirement (or the moon), but we can tell you how to get past the toughest part — knowing how to get started.

Let’s address these points one by one so you have a good idea of where to start your retirement journey.

Figure out how much you need to save

How much will you spend every year in retirement?

Unless you’re writing an episode of “Lost,” you need to start at the beginning, and in the case of saving for retirement, that means knowing how much you need to save. This number will serve as the finish line for your race to retirement, but keep in mind that it will be a rough estimate.

In the simplest terms, you’re trying to figure out how much money you need to live a comfortable lifestyle — which is up to you to define — until you die. Your first step should be to estimate how much income you’ll need for every year in retirement. There’s plenty of online worksheets and calculators that prompt you with questions to start thinking about your future expenses. Some basics include:

  • Health care costs, including medication and insurance
  • Housing
  • Food and entertainment
  • Transportation

This may sound overwhelming, but one shortcut you can take is to calculate all of your annual expenses now and make an educated guess on how those numbers will change when you reach 65 years old. Keep in mind, you may spend less on certain things, like transportation and entertainment, but more on others, like health care.

Calculating your ultimate nest egg goal

Now that you have a decent estimate of how much income you’ll need each year to sustain your laid-back retirement lifestyle, you can use that number to calculate your final savings goal. There are several theories on how to think about this, but one of the most popular is:

The 25x rule: The idea here is that you need to have 25 times your annual retirement expenses saved away in investments accounts before you can tell your boss what you really think of him. Each year, you withdraw roughly 4% from your savings — accounting for inflation from that first year you withdraw. According to a study by a team of professors from Trinity University, a nest egg built on this basis should last you at least 30 years.

As an example, assume you calculate your yearly expenses in retirement at $70,000. That means you’ll need to have saved $1.75 million in your accounts before you can make that first 4% withdrawal. Even a more modest income of $50,000 —which is close to the average expenditures of households headed by those 65 years or older, according to the latest data from the U.S. Bureau Statistics — requires amassing $1.25 million.

How much should you save every year?

Given the considerable size of the nest egg you’ll have to build up, the importance of sticking to a savings plan cannot be overstated. Again, the key here is not to feel overwhelmed and surrender to paralysis.

“Set your goal and write it down,” said Leon C. LaBrecque, CFP based in Michigan. LaBrecque recommends it’s a specific and achievable goal, such as 18% of your year’s gross income, and advises that you shouldn’t worry if you need to build up to that goal over time.

Putting away 18% of your gross annual income may sound like an unbearable and unsustainable sacrifice, especially if you have student loan debts, a mortgage and other pressing expenses. The beauty of calculating how much money you need to save overall is that you can pace the rate of your savings — within reason. Unless you expect a seven-figure windfall on your 60th birthday, you don’t want to put off aggressively saving for too long.

Fortunately, you have plenty of tools available to help you reach your savings goals, which we’ll look at below.

Max-out your retirement accounts

A recent Stanford study found approximately half of all workers in the United States qualify for some sort of employer-sponsored retirement savings account. The most well-known and prevalent of these plans is the 401(k), which allows employees to put a portion of their paycheck in a tax-deferred account. That means the money in your 401(k) is placed there before taxes and remains safe from the IRS until you start withdrawing funds from the account in retirement.

Many employers pledge to match whatever contribution you make to your 401(k) as part of their benefits package. The exact method and amount depends on the individual employer. You want to take advantage of the employer match and push it to the policy’s limits, otherwise you’re just leaving money on the table. “At least maximize the match, but more is always better,” said Kenneth B. Waltzer a CFP based in Los Angeles.

Waltzer also suggested younger savers look into choosing a Roth 401(k) if the employer provides that option. The main difference between a traditional 401(k) and a Roth 401(k) is that with the Roth option, the money you contribute is taxed before it goes into the account, instead of when you take your withdrawals.

What’s the difference for younger savers? Chances are your income places you in a lower tax bracket as a 20 year old than when you’re 50, reducing your total tax payments.

Open up your own IRA

Regardless of whether your job offers you a 401(k) account or not, you should also set up your own tax-advantaged retirement account. Individual Retirement Accounts (IRAs) come in all different shapes and sizes, meaning no matter what your employment or economic situation, you’ll likely find one to suit your needs. The two most common IRAs are:

  • Traditional IRA: The vanilla ice cream of retirement accounts, this IRA works a lot like a traditional 401(k). The money you place in a Traditional IRA remains sheltered from taxes until you begin withdrawing your money. You can begin withdrawals without paying a penalty at age 59 ½ . There’s an annual cap to how much you can contribute to any IRA, with Traditional IRAs maxing out at $6,000 (or $7,000 if you are 50 or older).
  • Roth IRA: As you may have guessed from reading about 401(k)s, money placed into a Roth IRA is taxed at your current income bracket. However, when you make your withdrawals, the money is tax-free. Younger people who believe they’ll pay more taxes in the future should choose this type of IRA over the traditional version. The contribution limit is $6,000 a year ($7,000 if you’re 50 or older).

Contribution rules unique to Roth IRAs

Unlike a Traditional IRA that allows you to contribute up to the limit without any restrictions, Roth IRA contributions are governed by your modified adjusted gross income (MAGI). The more you earn, the less the government allows you to contribute to your Roth IRA, eventually barring you from contributing anything. This begins to kick in when your MAGI is around $122,000 (if you file as single) or $193,000 (if you file as married jointly).

Prioritize the right investments for your age

Your 401(k) and IRA accounts don’t just magically grow your money for you. They serve as a tax-advantaged shelter for the earnings from your investments, and what you choose to invest in can make or break your retirement savings plan.

“In the beginning, what you save means the most, so focus on saving as much as you can and don’t worry about markets or research,” said LaBrecque. “As you approach retirement, preservation [of your savings] become critical.”

In other words, allocate your investment portfolio so it’s heavily weighted toward high-earning but more risky stocks when you are younger and can make up the financial hits you may take from the market.

“If you are age 30, you should have a good portion invested in equities, not all in bonds or cash,” said Joyce Streithorst, a CFP based in New York.

When you start injuring yourself in your sleep, that’s when you need to think about shifting your money into lower risk products since you don’t have an additional 40 years to save. Examples of these include:

Stick with the plan

This final piece of advice comes with a caveat, which is you need to remain flexible while still working toward your retirement goal. Events will crop up in your life that both help and hinder your plan, and you can’t let yourself either grow discouraged or overconfident. The most important action you can take is to keep plugging away at your savings, even if things look grim.

“Forget market timing. Forget hot stock tips,” said LaBrecque. “The key is to stay in the market. Missing the best 10 days in the S&P 500 over the last 20 years [would] cut your return in half. I’ve been doing this for 40 years and have always had some assets in the markets.”

You’ll also have to balance saving money for retirement with living your life. While some adherents of the FIRE movement may disagree, making yourself miserable for the sake of your retirement savings just makes you a slave to the future.

You are the most important part of the plan

The most crucial part of your retirement savings plan will be, well, you. Determining how much income you’ll need every year, how you can cut back on today’s expenses in order to save enough, how to invest and more depend on your lifestyle and current means. However, the above steps should provide you with a guide to getting started and bring you that much closer to reaching your work-free nirvana.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

James Ellis
James Ellis |

James Ellis is a writer at MagnifyMoney. You can email James here

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How to Invest: A Guide for Novice Investors

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

You’ve heard this line over and over again: To be smart with your money, you need to both build your savings and invest. The savings part is easy: Stash money away in a savings account — a little at a time — to pay for a particular goals, like an emergency fund or a new car. Investing is a different story, and learning how to buy securities that will grow in value over time isn’t quite so simple.

Investments are made for the long-term, and investing involves taking on risk. That might make you nervous, but investing is essential for your financial health. Compound interest and market gains can help your money grow a much higher rate than a savings account, helping you build long-term wealth for your retirement.

How to invest in 5 easy steps

The idea of investing might be intimidating, but don’t worry, it’s not as hard as you think. In fact, you can learn how to invest and get started in just five simple steps.

1. Start investing early

When you’re young, time is on your side. That’s especially true when it comes to investing. And the earlier you start the better, according to Dr. Brandon Renfro, a certified financial planner and an assistant professor of finance at East Texas Baptist University.

“Earnings from investments compound over time,” Dr. Renfro said. “The longer you give yourself to earn that compound return, the more money you will have when you reach a goal, such as retirement.”

For example, let’s say you invest $1,000 when you’re 25 in an investment account that earns 5% interest, compounded annually. Even if you don’t save another dime, your account will be worth $2,653.30 by the time you’re 45. Without you doing anything at all, your money more than doubled. If you continue to contribute some money to your account each month, your money could grow even more, and the longer you let your money sit in an investment amount, the more it will increase in value.

The market fluctuates, moving up and down, dramatically sometimes. But over the long term, the market produces regular returns. According to the financial firm Morningstar, the long-term average return from the stock market is near 10%.

Investing while you’re young allows you to ride out any short-term losses so you can take advantage of gains over the long-term. Even if the market dips over the near term, over the 20- to 30-year timeframe, you’ll see reliable growth rates.

2. Decide how much to invest

When deciding how much to invest, it’s important to take your goals into consideration. If you have high-interest debt or if you don’t have an emergency fund, it may make more sense to pay down your debt and build a small savings account before you invest.

After that, think about your long-term goals, such as planning for retirement. You’ve likely heard experts recommend that you save millions of dollars, but don’t let that scare you. When you’re just starting out, it’s important to start saving whatever you can and to keep contributing consistently.

Vanguard, one of the biggest investment companies, recommends that you save 12% to 15% of your income for retirement. If that sounds impossible right now, save what you can afford, even if it’s just $25 per month. Over time, those small amounts will snowball, helping you build a sizeable nest egg.

If your employer offers a 401(k) retirement plan and matches contributions, try to contribute enough to qualify for the full match. That’s free money you’d otherwise leave on the table.

3. Understand what you invest in

When you’re ready to start investing, it’s important to think about what kind of account you want to open. There are three core investment account types:

  • Employer-sponsored plans: Some employers offer retirement investment accounts to their employees, such as a 401(k) or 403(b). You may even be eligible for an employer contribution match, putting more money toward your goals. There are tax benefits to contributing to these plans, helping you save money at tax time.
  • Individual retirement accounts (IRA): An IRA is a great way for you to start saving for retirement on your own, outside of an employer-sponsored plan. There are traditional IRAs and Roth IRAs, which both offer tax benefits.
  • Individual investment accounts: Another way to save is by investing in an individual taxable account. There are no tax benefits to these accounts, but they also don’t have limitations on contributions or withdrawals like employer-sponsored plans or IRAs do. If you’re saving for a goal beyond retirement, like buying a home, an individual investment account is the best choice.

According to Natalie Pine, a certified financial planner and managing partner of Briaud Financial Advisors, IRAs and employer-sponsored accounts are strong starting points.

“There is no wrong way to save, but when you are young, a Roth IRA, 401(k), 403(b) is a great option,” Pine said. “You pay low taxes now and have tax-free growth for the rest of your life and the lives of your beneficiaries.”

Once you’ve chosen an account structure, you can think about what type of asset classes and investments you want to make. There are several different investment options:

  • Stocks: When you buy a stock, you’re purchasing a share of a company like Apple or Google. Your gains or losses are dependent on the company’s performance and trends in the stock market.
  • Bonds: Bonds are loans you make to the government or corporation in exchange for interest payments over a set time period.
  • Mutual funds: With a mutual fund, you pool your money together with other investors to purchase a mix of stocks, bonds, and other securities that would otherwise be too expensive to purchase on your own.
  • Exchange traded funds (ETFs): Like mutual funds, ETFs are pooled investment options that allow you to invest in a diversified portfolio. However, they’re traded like stocks on the stock exchange.
  • Index funds: An index fund follows the performance of a specific market benchmark, such as the S&P 500 Index. The fund’s manager will a preselected collection of hundreds or even thousands of stocks and bonds, diversifying your portfolio.
  • Options: When you invest in options, you create a contract that allows you to buy or sell a security at a fixed price within a specific period of time.
  • Cryptocurrency: Cryptocurrency is a digital representation of assets used to buy and sell goods; one of the most well-known versions is bitcoin. It’s a very risky and volatile investment options, but it’s gaining popularity.

4. Choose an investment strategy

Next, think about your investment strategy. Consider your own risk tolerance. Some people are comfortable taking on more risk, thinking it’s worth it to potentially see high returns. Others get panicky when they see the market dip, and prefer more conservative investments that offer lower, steadier returns. Choose an investment strategy that works for your comfort level.

When it comes to your financial goals, consider how long you have until your target date. For example, if you’re planning on retiring in 30 years, you can choose a more aggressive portfolio that’s more heavily invested in stocks.

If your goal is in the short-term, like you plan on buying a home within the next five years, you want to invest more conservatively. You may put your money in a high-yield savings account or invest in low-risk bonds.

The most important part is simply getting started.

“While it is important to plan, don’t let the details overwhelm you to the point of inaction,” advised Dr. Renfro. “It’s better to get started now understanding just the basics than to keep putting it off.”

If you’re feeling overwhelmed, consider investing through a robo-advisor. With this approach, an online broker like Betterment or Wealthfront reviews your financial goals and risk tolerance and comes up with a comprehensive investment plan for you.

The robo-advisor will invest your portfolio in a range of ETFs, mutual funds, stocks, or bonds, and will rebalance your portfolio as you approach your investment target dates. Many robo-advisors have low fees, and have no account minimums, so you can invest even if you don’t have a lot of money.

Check out the best robo-advisors of 2019 to get started.

5. Automate your investments

According to Pine, consistency is key to your success as an investor.

“With regard to investing, consistency is essential to avoid emotions driving decisions that ultimately lead to poor performance,” she said. “If you stick with a system, whatever that may be, you are more likely to weather various storms than if you trade around a lot and catch investments at the wrong time.”

Making regular contributions will help you build long-term wealth. When you’re short on cash each month, finding extra money to invest may feel impossible. However, there are different strategies you can use to invest, even if you don’t have a lot of cash:

  • Pick an investment account with a low minimum: Some discount brokers have very low account minimums. For example, Fidelity and Charles Schwab have $0 minimums, so you get started with just a few dollars.
  • Invest your spare change:Investment apps like Acorns allow you to engage in micro-investing, where you invest your extra change. The app syncs to your bank account or credit card. Every time you make a purchase, the app rounds it up to the next dollar, and deposits the difference to your investment account. For example, if you pay $2.53 for a cup of coffee, the app would deposit $0.47 into your investment account. Over time, those small amounts can add up.
  • Set up recurring contributions: If possible, set up recurring withdrawals into your investment account. Setting up automatic deposits will take out the money before you can mentally spend it, helping you stay on track.
  • Deposit windfalls: If you receive any money unexpectedly, such as a bonus at work, your tax refund, or a gift from a relative, deposit that money directly into your investment account. It’s extra cash, so you won’t need it to make ends meet, and it can help you reach your long-term goals.

Always keep learning

As a new investor, the most important thing to do is to get started as soon as possible. The earlier you invest, the more time your money has to grow.

After you’ve opened an account and made your initial investment, spend some time learning about your investment options. There’s always something new to learn, and growing your knowledge base can help you make more informed investment decisions, which can pay off over the long run. And keep reading on MagnifyMoney to learn more about investing!

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Kat Tretina
Kat Tretina |

Kat Tretina is a writer at MagnifyMoney. You can email Kat here

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Ally Invest Review 2019

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

If you’re looking for an online discount broker with no minimum investment requirement, Ally Invest may be perfect for you. Ally Invest is an ideal choice not just because you don’t need a fortune to open an account, but also because commission fees for trades are well below many competitors — especially for active traders who can earn discounts.

While Ally Invest is missing some common tools for investment research and their mobile app isn’t as feature-rich as some competitors, their full-featured online platform makes up for what the mobile app lacks. And, there’s a wide range of account options with Ally Invest, so you’re covered whether you want a taxable account, a retirement account, or an account for your kids.

Ally Invest
Visit AllySecuredon Ally Invest’s secure site
The Bottom Line: Ally Invest is an affordable discount broker with a wide range of investments to choose from.

  • Commissions are just $4.95 or $3.95 if you’re an active trader.
  • There’s no minimum deposit required for a self-directed trading account, and no minimum account balance requirement.
  • Ally Invest offers tons of investment options, including stocks, bonds, mutual funds, options, futures and forex.

Who should consider Ally Invest

If you’re looking for an affordable investment account, Ally Invest should be at the top of your list. You’ll have many choices for different types of accounts with Ally Invest, including traditional and Roth IRA, IRAs for the self-employed, taxable investment accounts, 529 Plan, and more. And, you won’t have to make a minimum deposit to open your account — it’s free.

Once you’ve got your account open, Ally Invest makes trading affordable for most investments. Commissions for stock trades are among the lowest of any online discount broker, and Ally Invest offers more than 100 commission-free ETFs. If you’re looking to buy Mutual funds though, you’ll pay a transaction fee, whereas some competitors offer ample fee-free options.

Ally Invest’s online trading platform is easy to use, and their research tools are good. While you won’t find earnings transcripts, SEC filings, earnings press releases or audio calls, you can still dig into technical data using free screeners and other tools powered by Recognia.

If you don’t want to manage all the investments on your own, you can opt for a managed account. This is Ally’s robo-advisor option — but you’ll need a minimum of $2,500 if you’d prefer this hands-off approach rather than a self-directed trading account.

Ally Invest fees and features

Current promotions

New Ally Invest accounts accounts receive 90 days of commission-free trades, up to $500 in value, regardless of deposit amount. Cash bonuses are available for new accounts starting at $50 for if you deposit or transfer at least $10,000.

Stock trading fees
  • $4.95 per trade
  • $3.95 per trade (30+ trades per quarter or daily balance of $100,000 or more)
Amount minimum to open account
  • $0
Tradable securities
  • Stocks
  • ETFs
  • Mutual funds
  • Bonds
  • Options
  • Futures / commodities
  • Forex
Account fees (annual, transfer, inactivity)
  • $0 annual fee
  • $50 full account transfer fee
  • $50 partial account transfer fee
  • $0 inactivity fee
Commission-free ETFs offered
Mutual funds (no transaction fee) offered
Offers automated portfolio/robo-advisor
Account types
  • Individual taxable
  • Traditional IRA
  • Roth IRA
  • 529 Plan
  • Joint taxable
  • Rollover IRA
  • Rollover Roth IRA
  • Coverdell Education Savings Account(ESA)
  • Custodial Uniform Gifts to Minors Act (UGMA)/Uniform Transfers to Minors Act (UTMA)
  • SIMPLE IRA (Savings Incentive Match Plan for Employees)
  • Trust
Ease of use
Mobile appiOS, Android , Windows phone
Customer supportPhone, 24/7 live support, Chat, Email

Strengths of Ally Invest

Ally Invest has plenty of strengths to help it stand out from the competition, including the following:

  • Low commissions: You pay just a $4.95 commission with Ally Invest, which is one of the lowest commissions charged by discount brokers and well below the $6.95 charged by competitors including E-Trade and TD Ameritrade. Plus, if you make more than 30 trades per quarter or have a daily balance of $100,000 or more, your commission is even lower — it drops to just $3.95.
  • No minimum deposit required: While competitors such as E-Trade require a $500 minimum deposit to open an account, Ally doesn’t have any minimum initial deposit requirement. You can also earn a cash bonus for opening an Ally Invest account if you deposit or transfer just $10,000, compared with a $25,000 minimum to earn a cash bonus with E-Trade or $20,000 with Merrill Edge.
  • Powerful tools and intuitive trading platform: Ally Invest’s online site offers you powerful tools to screen investments. Its trading platform is intuitive and provides the features necessary to be an informed investor. This includes a dashboard you can customize to your preferred view, as well as real-time streaming quotes and up-to-date data.
  • Responsive online and phone customer service: You can contact Ally Invest via phone 24/7. There’s also an online chat feature, where you can get answers within seconds from helpful customer service agents. Email support is available as well.

Drawbacks of Ally Invest

Ally Invest also has some downsides to consider:

  • Mutual fund transaction fees: Ally Invest charges a $9.95 transaction fee per trade for no-load Mutual funds. But many competitors offer options without any transaction fees, including E-Trade, which offers more than 4,400 fee-free funds.
  • A mobile app with minimal features: While you can do the basics with Ally Invest’s mobile app, it offers far fewer features and investment tools than competitor apps such as TD Ameritrade Mobile.
  • No physical branches: Ally Invest is an online-only company. There are no physical branches, unlike for competitors such as Merrill Edge, or E-Trade which has more than 30 branches spread across the country.

Is Ally Invest safe?

Ally Invest is a trusted online brokerage with more than $4.7 billion in assets under management. It’s a member of the FDIC and SIPC, so you can rest assured that the cash in your accounts is safe. And since the company has passed its FINRA broker check, you can count on the fact it’s in full compliance with regulations.

Since Ally Invest is online-only, it’s important to review Ally’s data protection policies. The good news is Ally promises that they use “multiple levels of security” to keep your info safe. This includes 128-bit SSL encryption for any exchange of data from your browser and Ally’s servers if your personal information is being transmitted. The downside, however, is that Ally’s privacy policy does permit Ally to share your information with third-parties. While this is a common policy, it’s still disappointing.

Of course, once you invest your money, there’s always a risk of losses. Research what you’re investing in carefully and diversify your portfolio to minimize risks you’re taking.

Bottom line

Thanks to the fact it has no minimum deposit requirement, Ally Invest is a great choice if you’re looking to get started investing and you don’t have a ton of money. Affordable commissions and commission-free ETFs also give you a diverse offering of low-cost or no-cost investment options. But if you’d prefer to buy Mutual funds without paying transaction fees or want a physical branch to visit, alternatives such as E-Trade or Merrill Edge may be a better choice to meet your needs.

Open an Ally Invest accountSecured
on Ally Invest’s secure website

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Christy Rakoczy
Christy Rakoczy |

Christy Rakoczy is a writer at MagnifyMoney. You can email Christy here