The Retirement Gamble

I watched a great little documentary today from PBS's Frontline called "The Retirement Gamble" and the retirement crisis in this country. It was fascinating really. It all came down to how uneducated our country is when it comes to investments and how people really have no idea how to invest for their retirement.

You may be in your mid-twenties and thinking, "retirement huh? I don't need to worry about that yet." With all due respect, you are wrong. But it's not necessarily your fault. It's not your fault that our school system fails to teach us basic money management, arguably one of the most important topics that everyone needs to learn because no matter what job you have later in life, you will still need to manage your money. It's not your fault that the banking and investment industry mesmerizes us with their talking baby commercials encouraging us to trade stocks and trade often (this increases your cost). It's not your fault that you start working and your company advises you to put money away in a 401k but then it doesn't give you any instruction on how to invest wisely. This is a problem. This is a big problem.

There are three very basic things all people need to know about investing:

1) Keep costs low! Costs of your investments and fees from the management companies make a huge different on how much money you end up having. Usually costs/fees can range anywhere from 0.04% of your investment to more than 2%. If you don't want to watch the entire video, skip to minutes 25-29. That will tell you all you need to know.

2) Compound Interest is another key and it's why you need to think about saving early. Don't be that person in his/her early 30's who hasn't started saving for retirement yet. The key to compound interest is time. The greater length of time you invest, the larger your money grows. Here is a great seven minute video on the topic.

3) Diversify your investments. Simply put, you don't want to load your 401k with company stock. The risk is too high. A much better choice, like Mr. Jack Bogle (founder of Vanguard) talks about in the documentary, are index funds which invest in hundreds of companies all in a single fund for minimal cost.

One thing Jack Bogle said stuck with me. He explains that millions of Americans invest while putting in 100% of the money, taking 100% of the risk, and only getting 30% of the return (in reality it's a little over 36% seen in the video at the 25 minute mark). People do this by investing in these ridiculously expensive mutual funds instead of cheap, broad-market index funds even though study after study shows that over long periods of time, you will earn more money by investing in index funds than the average mutual fund.

If you only watch a second piece of this documentary, please watch minutes 39-43. They are golden.

Oh and one more thing. If you are truly interested in learning about investments, I recommend reading anything you can get your hands on written by Jack Bogle. If you need somewhere to start, how about this interview. Enjoy.