Retirement Starts Now, Not Later

Retirement means different things to different people. To some, it's freedom. To others it's uncertainty. If you're young, you might not be thinking about your future—your lifestyle in retirement. But the truth is the earlier you start saving, the more freedom you'll have in your future.

Retirement Accounts: Your Financial Vehicle

How can I get started? One way to start is to open a retirement account and contribute to it consistently. In the contribution you can invest that money into stocks, bonds, and mutual funds. Through investment, you're compounding the retirement fund over time.

Markets rise and fall. There will be bad years that compel you to sell. There will be good years that tempt you to overbuy. But in the long run, the market has always gone upward, rewarding patient holding over panic selling.

Of course, there are certain risks in investing: investment accounts aren't FDIC insured and aren't bank guaranteed. But they gain value with time and discipline.

401(k)s and IRAs

Think of retirement accounts as two kinds of vehicles that drive your future self to the life they want.

A 401(k) is a company car. You get in, choose the route, and every time you get paid a percentage of your paycheck goes to the trunk. The best part: sometimes your employer puts in extra money.

An IRA (individual retirement account) is your personal car. You pick the model, the color, the music. It's smaller, maybe even simpler, but it belongs to you. You can open one whether you have an employer or not.

Both cars come with speed limits and guardrails. They give tax advantages for the trip ahead, but if you take an early gas station break—withdraw before you're 60—the extra tax will punish you. These rules seem bothersome until you understand that they're helpful: they prevent you from being tempted to use your retirement money on spending.

Open-End Mutual Funds

Open-end mutual funds are like a never-closing bakery. When someone pays, the bakery bakes more loaves. When someone wants their money back, the baker buys the loaf from them at the current price. The price is calculated by dividing the value of the fund over the amount of stock. That price is the NAV (net asset value) and it changes based on the fund's value.

Consider Joe. Joe starts a small fund by raising $400. He sold 4 shares for $100 each. If the fund's value grows to $1000, each share would be worth $250 (1,000/4). Now that Joe proved his investing expertise, more people want to buy shares, so the fund creates new shares for each share people want to buy. However, if the fund drops 10% to $900, all the shareholders suffer together because the NAV dropped. Mutual funds are flexible: they create shares when people buy and redeem shares when people sell.

Closed-End Funds

Closed-end funds are like a limited edition club.

At launch the manager sells a limited amount of tickets. The structures are set in stone. If you want out, you sell your ticket to someone else. That implies that the tickets' market price can fluctuate above or below the fund's value due to market demand. Similar to the open-ended fund, the manager gets 1%.

ETFs

Is there a way that can create new shares and sell them on the open market? Yes, the exchange-traded funds (ETFs). ETFs are the best of both worlds. They trade like stocks from 9:30 to 4:00. Only approved people can buy or redeem a big block of shares. Unlike an open-ended mutual fund that creates shares one at a time, the ETFs create and redeem thousands of shares at a time. Instead of buying directly, you would buy it from an institution that buys big blocks of shares. In contrast to the open-ended funds, ETFs simply own part of the market, so they don't need an active manager. Therefore, they have lower fees.

What matters most, however, isn't the engineering of the product. It's products promise: cost, return, convenience. If you want something cheap and minimal effort, an index ETF can do most of the heavy lifting. If you want to beat the market, a mutual fund will try while charging you for hoping. If you want scarcity and volatility, closed-end funds offer you opinion-based prices and opportunities to trade limited shares. All are tools to reach the same goal, but each with a different method of getting there. Pick the one that enables you to be a stoic investor rather than an impulsive one.

Stocks

Buying stocks is buying a piece of a company. It's like owning a slice of a pie. If a company has $10 million in assets but owes $6 million, then the equity would be $4 million, which belongs to shareholders. If there were 1 million slices—1 million shares—each slice would be worth $4.

Stocks are a claim on the company's future growth. That means they can go up… or down depending on the company's profits. You might own a millionth of a company today, and tomorrow the value of that millionth could double, halve, or stay the same. Individual stocks are riskier than bonds because companies fail, markets fall and rise, and luck influences your outcome. But in the long run, the stock market has gone up. Therefore, obtain patience as your greatest asset.

Bonds

Often companies borrow money from the public; these are called bonds. Buying a bond is therefore lending money to a company. For instance, if a company's debt is 6 million, it might issue 6000 bonds with $1,000 each. If you buy a bond for $500, the company promises to pay $1,000 at maturity—when it expires. The extra $500 is your interest. That's a zero-coupon-bond because there's no interest until they pay you.

Both stocks and bonds are traded. Unfortunately, it's not as easy to trade bonds. Fortunately, bonds are safer than stocks because you're a creditor, not an owner. If the company goes bankrupt, bond holders get paid before shareholders. On the flip side, bonds don't grow as fast as stocks; bonds have a constant velocity, while stocks have acceleration.

Time

Many books were written on how Warren Buffett made his wealth. Many are insightful. However, few focus on his wealth creation's simplest fact: Buffett's fortune isn't just from being a skilled investor but being a skilled investor for decades. Had he started in his 30s and retired in his 40s, he would be unknown.

Consider a hypothetical. Buffett began investing at 10 years old. By the time he was 30, he had a net worth of 9.3 million adjusted for inflation. What if he followed the path of a normal person, spending his teens having fun, partying, traveling the world and by the age of 30 his net worth was, say, $25,000? And what if he still went on to earn 22% annually but quit investing at age 60 to spend time with his grandchildren? What would his net worth be today?

Not $143 billion. $11.9 million. 99.9% less than his actual net worth. His skill is investing, but his secret is time. That's the importance of starting early: an exponential gap in wealth.