I’m starting to realize why so many people have no savings plan at all, especially if they happen to be U.S. citizens living overseas. Because this shit is complicated. And it really doesn’t have to be–it’s just that various people and corporate / government entities make it that way.
When I started my own little “I’d like to start putting money aside for retirement” journey, I had really modest goals. Take some of the money I’ve saved and put it somewhere that it can grow a little–keyword A LITTLE. No major risks, no gambling. No need to make tons of money or save for a house or for a child’s college fund. I just wanted to put money away and have it grow a little.
And that process–making a plan, setting up an investment account, and purchasing stocks–has taken almost a year.
There were so many hurdles it was mind-boggling. I got so many different messages from the different people I talked to that at this point I’m still not sure which way is up or down. People requested forms that didn’t exist, or refused to provide forms that did. I was pretty sure I wasn’t allowed to open an IRA, then I was told that I could, and then after going through a lengthy application process figured out on my own that I couldn’t (because I don’t have U.S.-earned income). After confirming that I couldn’t open an IRA my brokerage firm opened one for me anyway, so then I had to scramble to close it and go through a whole new application process for a brokerage account.
It’s probably not nearly this complicated for most people, especially if they’re trying to set up a retirement plan in their country of citizenship. But the whole process has left me feeling depressed and frustrated at how something that should be so basic–saving money for retirement–could be such a mess.
But there is hope. You can create a viable retirement plan–you’re just going to need some time and patience.
There are a glut of books and TV shows and financial trade publications out there that claim to tell you everything you need to know. By far the most helpful one for me has been The Bogleheads’ Guide to Investing. Written by three long-term investors and based on the advice of John C. Bogle, it lays out investing basics for people of all income levels and gives very rational advice about long-term saving.
That’s not to say that investing is “easy.” (I get really sick of people saying that, because then it makes me feel like an idiot when I find it complicated.) There are terms and concepts that are tricky to understand, and it will take time for you to figure out what strategy is best for you. But if you put forth a little time and effort, it’ll all start to make sense.
Today I finally invested a chunk of my savings in the stock market. I’m now going to just let it sit there and hopefully add to it every year for the next thirty or so years. And if the world doesn’t end by then, hopefully I’ll have enough money saved that I can live comfortably (modestly, but comfortably) when I retire.
So here, in a nutshell, is what I’ve learned over the past year, based on the aforementioned book’s advice and my own experiences. I’m leaving out a lot of the details of how to actually invest money, but you can find those in the book (and in other books).
1. Start now–but first pay off your debts. Easier said than done, I know. But get your debt–credit card debt, medical debt–under control before you start this process. Once that’s taken care of, start putting money away. The earlier you start, the better. Even if it’s just a few dollars a month, it’s something.
(I originally included student loan debt in this category, but as Ryan Cook pointed out below, that’s kind of a different category of debt, one that you may be paying off well into middle age. Probably better to start saving and investing before all your student loan debt is paid off.)
2. Make a plan. When I started casually asking people a year or so ago how they went about planning for retirement, I was shocked to discover how many of them had no plan at all. Sure, I was in the same boat, but some of these people had children, or houses, or very healthy incomes. And many of them were in their forties. And a lot of them simply said “Wow, I haven’t thought about that at all.”
Make a plan. Calculate whether you’re living within your means, and if you’re not, make changes. Decide if there are big things–house, kids’ college education–that you need to set aside money for. Calculate how much money you’re going to need for retirement, and then determine how much you have to put aside every month to achieve that (this can be really scary, but you need to do it). Just make a plan.
2. Most people have no idea what they’re talking about. When you decide to invest, you’re going to get a lot of advice, frequently from older family members. Some of it will be perfectly reasonable. Some of it will be ridiculous. The important thing to remember is that when it comes to investing in the stock market, almost nobody is an expert. Even people who’ve been doing it for years are not necessarily “better” at it than people who’ve just started. So take everyone’s advice with a grain of salt.
3. You probably don’t need to pay anyone to do this for you. Along the same lines, unless you’re extremely wealthy and have a lot of complicated decisions to make about how to handle your money, you can probably do this 99% on your own. I was actually desperate to pay someone to do it for me, but no one would take me on–they said my situation (as a U.S. citizen living abroad) was too complicated, or laws prohibited them from working with me. And in the end, people that you pay to help you may just end up costing you money, or may pressure you to buy stuff that isn’t good for you because it benefits them.
Still, if you can find a reputable, certified financial advisor to help you out, and if it gives you peace of mind to do so, then go for it. I might do it someday, if I’m living in the U.S. again and I have more money to figure out what to do with.
4. Live below your means. This is probably the single most important thing you can do to save for retirement. Keep a tally for one month of everything you spend. Look at what you’re spending too much / too little on. I’ll admit that I don’t keep a detailed budget every month (my partner does), but I do make mental notes about how often I eat out, whether I’ve made any luxury purchases, and whether I have any expensive necessities to take care of (a new computer, an air ticket home). If you’re living beyond your means, make changes.
5. Study. This stuff is boring, I know. I’d much rather be reading China Mieville. But it’s important, and if you don’t study up on the basics you’re more likely to make bad decisions. Think of it as that one college or grad school class that you hated but had to take. Buy books, read, and take notes.
6. Go with index funds. When you get to the point where you’re actually investing your money in some kind of stock, index funds are probably your best bet. Basically any individual stock (Twitter, Google, Sony) is going to go up and down in value–don’t listen to anyone who tells you that a stock is “guaranteed” to only increase in value. With index funds, you’re buying dozens–sometimes a few hundred–stocks all at once. That way when some go down, others go up, and it all evens out.
7. Tune out the noise. Ignore all the TV shows, books, and well-meaning family members who promise some kind of miracle strategy that will yield huge returns on a tiny initial investment, or who just claim to know how to “game the system.” Nobody can game the system. Some people are luckier than others, but their luck doesn’t last forever. Just make a plan that’s reasonable for you and stick to it.
8. Invest and then ignore. Even with index funds, the value of your money will fluctuate. If you invest $1000 in January, it may be worth $900 in December, and you may panic. And then it may be worth $1100 in December of the following year. And then $2000. And then $1700. You get the idea. If you’re prone to anxiety or impulsive decision-making, just don’t look at your investments more than once a year. Once a year, see how things are going and if you need to “rebalance” (sell some stuff, buy some stuff). But constantly buying and selling is expensive and will not benefit your net worth in the long run. You have to be willing to think very far ahead–say, twenty or thirty years–when your investment is likely to have yielded a decent return.
9. Diversify. This is one of those financial terms that gets thrown around a lot. Basically all it means is “don’t invest all your money in the same way.” Keep some of it in cash (deposited in your bank), keep some of it in a bank account that you can’t easily access, and keep some of it in different types of stocks (again, index funds). Not putting all your eggs in one basket is a pretty basic principle of investing.
Above all, just start thinking about the future and make a plan. You’ll feel a lot better once you get started. If you’re like me, you may also want to unleash hate-filled invectives at various bureaucrats, but that can also make you feel better. Just do it in the privacy of your own home.