Exactly How I’d Invest $50,000 for Retirement, Starting From Scratch | The Motley Fool

Even with today’s elevated inflation levels, $50,000 is still a lot of money. All by itself, it can potentially compound to over $1 million within the course of a typical career  if you get hold of it early enough and invest it well enough. Even more importantly, though, it just might be enough to enable a life-changing financial strategy that can serve you well throughout your career and beyond. It’s one that can work even if you’re starting from nothing and are already established in your career.

With that in mind, using that money to jump-start a lifetime investment strategy would be the basis of exactly how I’d invest $50,000 for retirement, starting from scratch. That kind of money is pretty close to two years’ worth of maximizing qualified retirement plan contributions available to many working Americans, and that’s what I’d target doing with it.

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Step 1: Fund a Roth IRA

For both 2021 and 2022, most people under age 50 can contribute up to $6,000 to a Roth IRA, and the limit is $7,000 for those aged 50 up. You do need a job to contribute to an IRA, as the contributions need to be able to be sourced to “taxable compensation” (essentially, money from working). You have until April 15, 2022, to make an IRA contribution for 2021,  and it makes sense to fund for both 2021 and 2022 if you have the money and ability to do so.

Do note that if your income is too high for a given year, you can’t directly fund a Roth IRA, but you may still be able get money into one through an approach known as making a Backdoor Roth IRA contribution. The benefit of getting money inside a Roth IRA is that once the money is there, it can grow tax-free within the account for the rest of your life.

Step 2: Put the rest in a savings account — temporarily

If you’ve funded two years’ worth of Roth IRA contributions, you’ve just used between $12,000 and $14,000 of that $50,000. That leaves you with between $36,000 and $38,000. Take that money and put it inside a savings account. That money becomes cash to help you transition to a paycheck that is a bit lower than you’re used to living on.

One great retirement savings tool that many Americans have access to is a Roth 401(k) or similar plan through their work. If you’re under age 50, the typical contribution limit is $20,500 per year in 2022. If you’re 50 or up, that limit jumps to $27,000.  One of the best parts of those plans is that they get funded directly from your paycheck. That gives you the chance to save for your retirement automatically and never miss the money that you don’t see.

The challenge, though, is that if you’ve gotten used to living off of your full paycheck, it can be hard to transition to a lifestyle that relies on less. By putting the remainder of that $50,000 nest egg in a savings account, you give yourself a buffer to pull from to make it easier to get used to living on less than you had been taking home before. After all, if you find that you need the money, it’s there for you. I

Step 3: Sign up to max out your Roth 401(k) at work

If a Roth 401(k) plan is available, sign up to contribute enough out of your paycheck to reach your maximum contribution within the year. Because it is a Roth-style 401(k), the money is contributed after- tax into the account. Your take-home paycheck will drop dollar-for-dollar for your contribution, but the money can then grow completely tax-free for your retirement.

If you’re paid every two weeks, that’s somewhere between $788 and $1,039  out of each paycheck. That’s a pretty large cut in take home money every payday, but you have that money in savings that you can tap to cover gaps as you adjust to the lower take home.

The goal is that between raises and lifestyle adjustments, you can get to where your paycheck covers your costs, even if that paycheck is down a bit because of your Roth 401(k) contributions. With between $36,000 and $38,000 in your savings, you’ve got over a year to adjust to that new reality in as painless a way as possible.

If you can get there, congratulations! You’ve now got yourself to a spot where you can sustainably and automatically invest for your retirement every payday. That’s one of the best long-term approaches to building wealth. If you can’t get there, well, you’ve at least gotten $50,000 into your Roth-style retirement accounts over the course of two years. That’s a great foundation of cash that can compound for you tax-free for when you do retire.

It’s possible that you’ll end up somewhere in between; maybe at a spot where you’re able to sustainably sock away around half of the maximum you’re allowed in your Roth 401(k). That’s fine, too. Between the $50,000 you initially invested and the continuing contributions you’re able to make, you’ll be well on your way to a more financially comfortable retirement.

Step 4: Decide where to invest the money

Of course, getting money into your Roth IRA and Roth 401(k) type plans is only part of the battle. The next key step is to figure out how to invest that money. One great strategy is the one that Warren Buffett is recommending to his own family for how to manage their wealth after he passes: Keep it nearly all in low-cost, broad-based, stock-focused index funds.

Making regular investments into index funds has been a time-tested way to outperform Wall Street’s best and brightest over time. When a simple and low cost strategy works wonders, there’s rarely a need to make things more complicated. Especially if you’re just starting out investing, putting your money in a low-cost, broad-based, stock-focused index fund is a great way to go.

Once you’re on track for your retirement, adjust your strategy over time

As great as this strategy may be to get you to invest your first $50,000 for retirement, it works best as you’re just getting started. As you get closer to retirement and your overall financial situation changes, your needs and priorities for your investments need to change as well. Once you’re comfortably investing for retirement and are on track for that goal, feel free to make changes to reflect your new reality.

You’ll likely find that once your retirement plan is on track, it gets easier to make the other financial priority calls you’ll face. That makes getting started with your first $50,000 one of the most powerful financial moves you can make. So whether you have that $50,000 today or are still looking to come up with it, make today the day you get your plan in place.

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