Reader Question: Saving Money for Retirement

If you have questions about your finances, you are not alone. In fact, here at Your Finances Simplified we often receive financial questions from our readers.

For example, one of our readers, Leon, recently asked:

What is the best way to save money outside of contributing to a company 401k?

The Answer

First, let me say that saving money is not what you need to be doing for your retirement. You need to invest money. Saving is like stocking the pantry for a winter storm. You may have 20 cans of tomato soup on the shelf, but a year later, you will still have just 20 cans of soup on the shelf (assuming you dodged the storm).  Prudent investment is the key driver to successful retirement. You have rightly mentioned the 401k as an investment vehicle. These certainly have a place in any retirement plan, if the employer kicks in a matching contribution. That said, in most cases, I would hold the level of your contribution to the equivalent of the employer’s matching contribution.

Any monies that you can afford to invest beyond the 401k matching contribution should be invested elsewhere. Elsewhere is pretty vague, I know, but you can find investments that outperform your 401k. This is what I mean by “elsewhere.” Call me a control freak, but I like to manage my own money. The 401k your employer provides doesn’t allow you very much control over the manner in which your money is invested.

Other Options

Financial circumstances vary widely from person to person. Specific advice is difficult to offer. I can, however, offer suggestions:

  • Dividend stock
  • DRIPs
  • ETFs
  • REITs

This short list is by no means comprehensive. There are countless ways to invest money, but there are also countless ways that Uncle Sam can part you from it. When you plan for retirement, avoiding or deferring taxes has to be a priority. For the tax implications alone, IRAs of all stripes should be investigated as you formulate your retirement plan.


You didn’t mention your age Leon but that is also a critical factor. If you are a twenty something, you can afford riskier investments which typically pay greater returns. However, if you are in your forties, you may want to invest more conservatively, which reduces risk and reduces returns.

If my answer seems like a “cop-out,” it is! Ethically, I can’t be specific without knowing your financial circumstances, goals, age, income etc. because absent this information, I might lead you astray. Browse the newsletter! You will find a great deal of information on retirement.


Thanks Leon for your question! We hope this helps!

Expanded Answer

 

After seeing the answer to his question, Leon revealed his age to be 33. So, we expanded on his answer a bit…

This is a great age to begin a serious retirement plan. Most of us are stable in our early thirties, have a good career path in place and have most of our ducks in a row on the home front.

At this stage, Leon could make some fairly aggressive investments, taking moderate to high risks for higher returns (and possible losses). However Leon, you should gradually reduce the level of risk you are willing to accept as you near forty.

This strategy will allow you the opportunity for greater gains in your retirement portfolio as you move toward your peak earning years while preserving your opportunity to make up for any losses you may have incurred along the way.

Think of it as moving from the roulette table to the blackjack table.

If you have a financial question, send us an email at yfsteam@yourfinancessimplified.com! Our experienced team can help with a variety of financial topics.

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Comments

  1. Excellent advice, so many people just save and forget to invest and then regret it later in life. I myself am guilty but am slowly making the change from saver to investor. Great post, thanks for sharing.
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