How to Invest for Retirement

There are three steps, and too many people neglect the last one.

Brian Stoffel
Brian Stoffel
Jun 3, 2017 at 6:50AM
Investment Planning

Human beings weren't made to save for retirement. For 99% of our existence on earth, we lived in tribes. Our roles would change as we aged, but there was no "retiring." A built-in function of this lifestyle was also cradle-to-grave insurance: As long as we took care of the tribe, it would take care of us.

We don't live in that world anymore, but we can still learn something from it. If you follow these three steps toward investing for retirement -- building up a safety net, living below your means and investing the difference in low-fee ETFs, and developing your passions -- your golden years could be your most enjoyable yet.

An indigenous woman with arms raised triumphantly toward an open field.

Image source: Getty Images.

1. Build up that safety net

Obviously, feast and famine were a part of life during the Stone Age. What we often forget, though, is that the struggle was shared: One group of people didn't eat while the others starved to death.

Because everyone in the tribes was necessary for survival, the hard times were shared -- everyone ate a little less. While that dynamic doesn't play out in modern society the same way, we have our own systems in place to provide a safety net -- namely, insurance and an emergency fund.

By far the most important thing to square away to save for retirement is insurance -- be it healthcare, auto, homeowners, disability, or long-term care. Without said insurance, one freak accident could wipe out all of the work done in steps two and three.

Once that's done, an emergency fund needs to be started for the very same reason. If you don't have enough money on hand to make ends meet for (at least) three months without income, one untimely firing could also undo all the work you put toward saving for retirement.

2. Live below your means and invest the difference

Our ancestors had a built-in way to ensure they didn't over-consume. Food wouldn't stay good forever, so they were much quicker to give any extra stuff away than hoard it. And goods were burdensome for hunter-gatherers who were nomadic.

But don't be blinded to the obvious investments they made. By giving away their extra food and providing for one another, they were investing in their futures. Surely, if/when they fell on hard times, the tribe that they had supported would be there to support them.

That's the approach we have to take today to our own retirement portfolios. First, we have to live below our means. No amount of investment acumen will help you build up a nest egg if you have nothing to invest in the first place.

And then, we simply have to invest the difference. If you don't want to spend all of your time researching options, simply put your extra cash in a tax-advantaged retirement account every month, and invest it in a low-fee ETF that gives you broad exposure to the market. The SPDR S&P 500 ETF (NYSEMKT:SPY) or Vanguard Total Stock Market ETF (NYSEMKT:VTI) are good places to start.

In terms of where to put your money, I suggest:

  1. Contributing whatever you need to in order to receive the maximum "match" for your employer's 401(k).
  2. Opening up and investing in an IRA.
  3. Returning to the 401(k) and contributing whatever else you can.
  4. This may involve some planning since you usually only have one opening to choose your 401(k) savings per year. But this is a multiyear approach, and you'll learn as you go.

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3. Don't forget to pursue those passions

This last point might seem a little odd, but hear me out. Wes Moss, author and host of the Money Matters radio show, has done the research on what it take to be happy in retirement. What he's found is that happy retirees enter retirement with an average of 3.6 core pursuits, while unhappy ones have fewer than two.

A senior citizen taking a break from a run in an open field.

Image source: Getty Images.

What is a core pursuit? It can be any activity that gives you purpose and meaning; gardening, being with grandkids, coaching, volunteering, painting, and traveling would all qualify as core pursuits.

The key here is that Moss' subjects were measured based on how many core pursuits they had upon entering retirement. That means that burning the midnight oil to save for retirement -- while neglecting all other parts of your life -- might give you a big account, but it won't do much for your lived experience once you call it quits on work.

Of course, our ancestors didn't have to worry about this. They famously had an order of magnitude more leisure time than we did. That's why it's important we heed the message that they -- and Moss -- knew all too well: A balanced life with varied interests pays its own dividends over time.

Follow these three steps -- building up your own safety net, living below your means and investing the difference, and pursuing your passions -- and it will be hard not to enjoy a comfortable and engaging retirement.