A lot of people get discouraged when it comes to putting money toward retirement. Whether it’s due to stagnant income or confusion over investment options, almost one-third of Americans have fewer than $5,000 saved for retirement, according to a recent study.
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But growing your retirement fund doesn’t have to be a scary proposition.
“How many of us have heard the advice that we need to invest in the stock market?” self-made millionaire and personal finance guru Ramit Sethi tells CNBC Make It. “The common way we think about investing is sitting in front of four [computer] monitors, watching all these words fly by — ‘P/E ratios, asset allocation’ — and, then we make some investment.
“That’s not how you invest.”
Instead, Sethi, who wrote the book “I Will Teach You to be Rich” and founded GrowthLab.com, a website with advice for entrepreneurs, advises looking into something called a target-date fund for retirement investing.
“What you need to do is start off in a really simple way, and all you need to know is the date that you are going to retire,” he says.
This is how Sethi describes the process of starting a target-date fund: “The computer knows how old you are; it knows roughly when you’re going to retire — let’s say 65 [years old] — and then it creates a nice portfolio for you.”
Also known as life-cycle funds, a target-date fund is a plan offered by investment companies that involves spreading money around various assets with an ultimate goal of raising enough money for retirement by the specific date that the investor chooses. You can think of the fund as “a pie chart,” Sethi says, with some of your invested money going into stocks and equities, some going to fixed income investments like bonds and some remaining in cash.
“I love these funds for a few reasons,” Sethi continues. “No. 1, they are simple. You don’t need to pick stocks.”
In other words, you don’t need to have a strong understanding of the stock market to invest. The only thing you need to worry about, Sethi says, is how to get as much money into the fund as possible each month. Do the math to determine how much money you can afford to put away and then follow through by investing “as much money as possible, every month, consistently, automatically and that fund is just going to grow and grow,” he says.
Sethi also loves target-date funds because they are “low cost,” he says. “These funds are not gouging you with 2 percent [investment] fees. Most of them charge less than 0.2 percent, so it’s extremely affordable. It’s a great option for beginning investors.”
While the simplicity of target-rate funds makes them an attractive option for retirement saving, some experts note that one drawback for investors with those funds is the lack of customization they offer. Some investors simply would prefer to have more control over choosing the specific assets in which they’re investing. Also, the fees vary from fund to fund, so it’s important to do your research and make sure you aren’t giving away more of your savings than is necessary.
For what it’s worth, the bulk of Sethi’s own money is currently invested in target-date and index funds, he says.
“It’s a great investment, a great way to get started” saving for retirement, he tells CNBC Make It.
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