Investing can seem complicated, and every once in a while, it actually is complicated. But there are a few simple rules to follow to make sure you are doing a pretty good job saving for your retirement. Importantly, when you’re looking for a financial adviser, you want one that will charge a small fee to help you remember these simple concepts. Not one that will charge a large fee to constantly deviate from these concepts in an attempt to beat the market.
Note: This was originally published on December 24, 2015 and was several times after that, most recently on March 17, 2023.
![](https://www.lutherwealth.com/wp-content/uploads/2020/04/Justin14of33-1-scaled.jpg)
The Rules
- Reduce Taxes. Maximize contributions to tax-advantaged investment accounts like 401ks, IRAs, 529 plans, HSAs, SEPs, etc. Understand your employer’s match policy for each account. Avoid breaking into these accounts to pay for emergency expenses. Pay close attention to income-based contribution limits.
- Reduce Fees. Invest mostly, or entirely, in low-fee index funds and ETFs. Target Date retirement funds are good. Don’t day trade. Don’t pay an adviser to trade your account on a commission basis. Avoid commissions in general. Don’t be fooled by advisers claiming to charge low, or no, fees but then invest you in a bunch of high-fee ETFs.
- Don’t Buy Single Stocks. You don’t know anything that the market doesn’t know, and the market knows a whole bunch of things that you don’t know. Definitely don’t buy stock in the company you work for. You have already bet a big part of your long term financial health on your company by working there– you don’t need to double-down by buying stock.
- Don’t Carry a Balance on Your Credit Card. If you have to because of an emergency or unexpected expense, prioritize paying the balance down over other investments.
- Get Some Health Insurance. Get a level of coverage that kicks in when you hit an expense that would be catastrophic if you were uninsured. In other words, if you think you can reasonably handle a $1,000 unexpected health expense, but $1500 would be unmanageable, then $1000 is a good deductible for you. A lower deductible will just make your policy unnecessarily expensive. Make sure to take advantage of programs such as Affordable Health Care Act subsidies which may significantly reduce out-of-pocket health care costs.
- Keep Some Emergency Cash. 3 months pay should do it. You don’t want to have to make changes to your portfolio if you get into a fender bender. Anything above 3 months can go in a high-rate savings account if you want a safer cushion.
- Manage Your Debt. Find out which loans have variable and fixed rates and what those rates are. Prioritize paying down high-rate debt first. Consult with a tax expert on which interest payments are tax deductible. Make a plan for paying it down and stick to it.
- Think Long Term. Don’t try to time the market. You are investing for retirement and for your family’s education. The little market rally or downturn that you are worrying about right now isn’t going to matter much by the time you retire (unless you’re retiring in the next 3 to 5 years). In general, avoid or ignore all financial news.
- Diversify. You can make this part as simple or as complicated as you like depending on your situation. But at a minimum, you should have a stock fund and a fixed income fund. A target-date fund accomplishes this by having some of both and it will shift the balance towards fixed income as you approach retirement. I specialize in diverse portfolio optimization.
- Cover Your Personal Risks. Are you the sole breadwinner for a family? Make sure to have some life insurance. Use low-fee products to manage your individual risks, but don’t try to chase market-beating returns with complex financial instruments. Be wary of financial salespeople here. “Customized” is sometimes synonymous with “Expensive”.
- Control Your Living Expenses. Along with your income, your annual expenses are probably the biggest determinant of how much money you will have saved up when you retire. Work out an annual spending budget. Review card spend reports. Try to solve the equation: After-tax income – Spending = Annual Savings. If you can’t solve it, you are spending money that you aren’t aware of. Consider driving your current car for a bit longer.
- Hire a financial adviser. As your income and savings grow, you will increasingly need to make more difficult decisions on how to save your money. Hire an ethical, low cost financial adviser to help make better decisions. Have them help you with lifetime financial planning and establishing a well diversified portfolio.
Discover more from Luther Wealth
Subscribe to get the latest posts sent to your email.