Save for Retirement - Invest with a balanced ETF portfolio

It's time to start building your nest egg for retirement. The earlier you start this step of my 6 step plan, the faster your money will grow. It's essential you start after eliminating credit card debt and stick to your budget. If disaster strikes, fall back on your emergency fund and don't touch your retirement investments. You can easily ruin your returns and get hit with fees by withdrawing your retirement account early.

Even if you plan on serving 20 years and using your military pension you need to start your own retirement account. Why? People change, plans change and you'll need money to maintain your lifestyle. Social security will be long gone when you retire. Set a goal of investing 20% of your salary towards retirement. Incorporate it into your budget and have a monthly automatic deduction into a money market account.

The amount of information about retirement choices can be overwhelming. I'll simplify it for you with a safe, diversified method of investment. People often get confused about accounts, investment vehicles and taxes so I'll make a simple analogy. Your retirement account is a designated field with investments you plant. You can choose to either pay taxes on the weight of the seeds (Roth IRA) or the full grown crops (Traditional IRA) at the end. Think about the compounding interest chart, it makes sense to pay taxes on the principal (blue) so you don't have to pay taxes on the larger interest (red and green).

You should fund your retirement accounts in this order:
  1. Employer matched contributions (it's free money, sadly not an option for active duty military)
  2. Roth IRA - $5,000 yearly contribution limit
  3. Thrift Savings Plan (TSP) - $16,500 yearly contribution limit (or your company 401k plan)
There's tons of information on where to put your money. The safest bet is to invest in as many companies as possible while minimizing your costs. You accomplish this by buying Electronically Traded Funds (ETFs). The ones I recommend track index funds which are funds made up of hundreds of stocks and have low maintenance fees. Historically stocks perform better than bonds and smaller undervalued companies have performed better than large ones. The following plan assumes you have at least 10 years until retirement and diversifies your portfolio not only across US companies, but across the entire world.
  • Open a Roth IRA account at Firstrade. Send me an and I'll refer you, earning you five free trades. Firstrade has no IRA fees and gives you a free dividend reinvestment plan (DRIP), which compounds your earnings.
  • Save $5,000 a year either by setting up an automatic deposit to Firstrade or an automatic monthly deduction into a money market account.
  • On November 1st of every year buy these ETFs for a balanced portfolio:
    • 45% US Total Stock Market (VTI)
    • 20% Foreign Markets (VEU)
    • 15% US Small & Mid Caps (VXF)
    • 10% US Small-Cap Value (VBR)
    • 10% Emerging Markets (VWO)
You can get close to the same balanced portfolio with TSP using a breakdown of 35% C fund, 35% S fund, and 30% I fund. For you flyers out there consider putting all of your flight pay into TSP every month. It follows the principle of "pay yourself first." If that money isn't sitting in your checking account you'll never miss it.

You'll need to rebalance your portfolio when you get within 10 years of retirement to reduce volatility. Try using life-cycle funds from USAA, they'll automatically adjust your risk as you get close to retirement. You can beat the returns of ETFs using individual stocks but it's riskier and requires you to do research. If investing doesn't interest you, stick to this simplified plan.

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