A Guide to Saving for Retirement

The goal of this article is to help give you the tools to save money more responsibly and to give you more ability to do as you please through financial freedom. The first step is recognizing that you want to be financially secure and are willing to make some sacrifices now in order to protect and nurture your future. Are you?

If you think you’ll get rich playing the stock market or the real estate market or the Japanese trading card market (you know you’re still saving those old Pokemon cards for a reason.) Stop right now. Stop thinking you can beat the market. No one can accurately predict the market. No computer or fund manager is able to do it. It’s impossible. There are too many factors involved. It’s you versus the entire pool of individuals investing in the market. The system is rigged against you. Don’t believe me? Read Black Swan by Nassim Taleb. He accurately shows what smart investors have known for years: even the best trained professional traders can’t beat the market over long periods of time. The strategies heretofore utilize a strategy that has a proven track record, indexing. Indexing is investing your money in a large and balanced pool of companies. It works, because while some companies fail and others triumph, you can be sure that, on average, over long periods of time, companies want your money and are willing to provide you a premium for it. This premium ends up being ~7%/year on average over long periods (15+ years.) While each individual stock will rise and fall based on their product/service and market conditions, the index of the market will rise over long periods of time. In short: Stop thinking you can beat the market.

Money is valuable insofar as it can be spent. And spending takes time. For this reason, your money has value over time to others. This value is called the time value of money and is rewarded with interest. For this reason, you must start saving now. Your money saved today is worth a lot more than if it is saved 10 years from now. I could show some crazy graphs, but just trust me. You’re probably going to get very rich if you’re under 30 and start saving now. If you’re not ready just stop reading.

Below, I’ve gathered from  my favorite resources ways to start building your nest egg and saving money. For each individual, this will be a little bit different. This strategy will work for most people and it’s principles are universally applicable.

Here is the order of priority in which you should be treating your savings to optimize for stable growth.

Pay off your debts

Pay the high interest debts first, low interest next. Debt is both a psychological and financial burden. Get rid of it as soon as you can. By paying your debts off sooner rather than later, you will be preventing unneeded interest payments and placing yourself in a good spot to start saving soon. Your debt is an emergency. Treat it as such. Don’t let it spoil some well-earned fun. But do realize that many disposable expenses should be eliminated during this time.

Build an Emergency Fund

Save up 3 months of living expenses ($5,000-$8,000). You never really know what’s going to happen in life. But, if it sucks, chances are it’s also going to cost money. You want to be able to live in peace and prevent racking up debt by having some money saved up for emergencies. This should be in a place that is very easy to access and spend like a savings account. It doesn’t matter if it doesn’t get good interest. This is your piece of mind and just-in-case money. Never touch it unless you absolutely need to. And if you do, do so with as little guilt as possible because emergencies are the only acceptable reason to spend this money.


If you have one available, use your employer’s 401k match. It’s free money and it’s pretty much guaranteed extra income. Invest in funds with the lowest expense ratios you can. You’re naturally going to be fairly limited by whatever funds are a part of your employer’s plan. This is a longterm investment, so try and split it up in 60% Domestic Index Fund (S&P 500), (40-yourage)% International Index Fund, and (Yourage)% Bond Index Fund. Or you can just use the Target Retirement Funds most companies offer. These will do just fine. Just put in enough to get your employer’s match. You won’t be able to touch this money, except for a few situations, until you’re 55.

Roth IRA

This has nice tax advantages and can be withdrawn at any time. Though you shouldn’t withdraw from it because the money is worth more in this tax-shielded account than anywhere else. Specifically, you should open a Retirement Target Date Fund based on when you think you’ll be retiring (Vanguard has some really good ones.) This is going to be maxed at $5,500/year. You should try and max this Roth IRA out. A Roth IRA is after-tax, so any money you put in, along with it’s earnings, is tax free upon withdraw. This is particularly nice, because in a non-IRA, you’d have to pay a capital gains tax on any more you earned.

Short Term Savings

Beyond our retirement, chances are you have some things in the middle future (3-10 years) that merit some savings. Even if you’re unsure of your future, (isn’t this everyone?) you should still have some savings for short-term spending. This is based on individual goals. It gets taxed for real this time. No shielding as you get with the 401k and Roth. But you generally have more options and less restrictions with this money. I’d recommend you buy up Target Retirement Date Funds for retiring 5 and 10 years from now. You can tweak this a bit based on your age. These funds are designed to be for older people who are ready to retire and need a stable growth fund that doesn’t fluctuate a whole lot (they do this by making these funds very bond heavy.) This money can be withdrawn any time, but it’s earnings will always be taxed.

If you have any money left over, place it back into maxing out your 401k (this can be done up to $18k/year.)

After that I’d start thinking about seeing an independent financial advisor to help you invest in retirement funds. But having more in target funds 25-40 from now would probably be a smart choice, depending on your work situation and expected spending.

Setting this all up and maintaining it won’t take more than a couple hours every few months (if that.) You won’t have to worry about day-to-day fluctuations. Do not be intimidated by the fancy sounding names, these retirement funds are super easy to setup. It takes less than 15 minutes for most of them.  I really like using Vanguard funds because they are cheap and easy to work with. But, I’ve heard good things about some other companies as well.


The Millionaire Next Door

The BogleHead’s Guide to Investing

Black Swan- Nassim Taleb

I Will Teach you to be Rich- Ramit Sethi

Your Money or Your Life