Conservative ways to save for retirement?

Question

I was just wondering if there were any conservative ways to save for retirement. I am currently 24 years old and I started my first salaried job out of college a month ago. I am extremely conservative with my money and I am not entirely comfortable with a 401k because it seems to me that I am gambling with my money.

That being said, I still did sign up for my companies 401k program and plan to put as much as they match to make the most out of it. But are there any more ways to save for retirement that are more conservative?

Answer 1

A 401(k) is just a container. Like real-world containers (those that are usually made out of metal), you can put (almost) anything you want in it.

Signing up for your employer's match is a great thing to do. Getting into the habit of saving a significant portion of your take-home pay early in your career is even better; doing so will put you lightyears ahead of lots of people by the time you approach retirement age. Even if you love your job, that will give you options you otherwise wouldn't have.

There is no real reason why you can't start out by putting your retirement money in a short-term money-market fund within that 401(k). By doing so you will only earn a pittance, probably not even enough to keep up with inflation in today's economic environment, but at this point in your (savings and investment) career, that doesn't really matter much. What really matters is getting into the habit of setting that money aside every single time you get paid and not thinking much of it. And that's a lot easier if you start out early, especially at a time when you likely have received a significant net pay increase (salaried job vs college student).

I know, everyone says to get the best return you can. But if you are just starting out, and feel the need to be conservative, then don't be afraid to at least start out that way. You can always rebalance into investment classes that have the potential for higher return -- and correspondingly higher volatility -- in a few years. In the meantime, you will have built a pretty nice capital that you can move into the stock market eventually.

The exact rate of return you get in the first decade matters a lot less than how much money you set aside regularly and that you keep contributing. See for example Your Investment Plan Means Nothing If You Don’t Do This by Matt Becker (no affiliation), which illustrates how it takes 14 years for saving 5% at a consistent 10% return to beat saving 10% at a consistent 0% return.

So look through what's being offered in terms of low-risk investments within that 401(k). Go ahead and pick a money-market fund or a bond fund if you want to start out easy. If it gets you into the habit of saving and sticking with it, then the overall return will beat the daylights out of the return you would get from a good stock market fund if you stop contributing after a year or two. Especially (but not only) if you do pick an interest-bearing investment, do make sure to pick one that has as low fees as you can possibly find for what you want, because otherwise the fees are going to eat a lot into your potential returns, benefiting the bank or investment house rather than yourself.

Just keep an open mind, and very strongly consider shifting at least some of your investments into the stock market as you grow more comfortable over the next several years. You can always keep a portion of your money in various interest-bearing investments to act as a cushion in case the market slumps.

Answer 2

I didn't even have access to a 401(k) at age 24. You're starting early and that's good. You're frugal and that's good too. Retirement savings is really intended to be a set it and forget it kind of arrangement. You check in on it once a year, maybe adjust your contributions.

While I applaud your financial conservatism, you're really hamstringing your retirement if you're too conservative. At age 24 you have a solid 30 years before retirement will even approach your radar and another 10 years after that before you have to plan your disbursements. The daily, monthly, quarterly movements of your retirement account will have literally zero impact on your life.

There will be money market type savings accounts, bond funds, equity funds, and lifecycle funds. The lifecycle fund rolls your contributions to favor bonds and other "safer" investments as you age.

The funds available in retirement accounts will all carry something called an expense ratio. This is the amount of money that the fund manager keeps for maintaining the fund. Be mindful of the expense ratios even more than the published performance of the fund. A low fee fund will typically have an expense ratio around 0.10%, or $1 per $1,000 per year in expense. There will be more exotic funds targeting this or that segment, they can carry expense ratios nearing 1% and some even higher.

It's smart to take advantage of your employer's match. Personally, at age 24, at a minimum I would contribute the match to a low-fee S&P index fund.

Answer 3

It has been hinted at in some other answers, but I want to say it explicitly:

Volatility is not risk.

Volatility is how much an investment goes up and down, risk is the chance that you will lose money.

For example, stocks have relatively high volatility, but the risk that you will lose money over a 40 year period is virtually zero (in particular if you invest in index funds).
Bonds, on the other hand, have basically no volatility (their cash flow is totally predictable if you trust the future of your government), but there is a significant risk that they will perform worse than stocks over a longer period.

So, volatility equals risk only if you are day trading. A 401(k) is literally the opposite of that.

For further reading: Never confuse risk and volatility

Also, investing is not gambling.

Gambling is bad because the odds are stacked against you. You need more than average luck to actually win and the longer you play, the more you will lose.
Investing means buying productive capital that will produce further value. The odds are in your favor. Even if you do a moderately bad job at investing, the longer you stay, the more you will win.

Answer 4

I'd say that because you are young, even the 'riskier' asset classes are not as risky as you think, for example, assuming conservatively that you only have 30 years to retirement, investing in stocks index might be a good option. In short term share prices are volatile and prone to bull and bear cycles but given enough time they have pretty much always outperformed any other asset classes. The key is not to be desperate to withdraw when an index is at the bottom. Some cycles can be 20 years, so when you need get nearer retirement you will need to diversify so that you can survive without selling low. Just make sure to pick an index tracker with low fees and you should be good to go. A word of warning is of course past performance is no indication of a future one, but if a diversified index tracker goes belly up for 20+ years, we are talking global calamity, in which case buy a shotgun and some canned food ;)

Answer 5

Dividend reinvestment plans are a great option for some of your savings. By making small, regular investments, combined with reinvested dividends, you can accumulate a significant nest egg. Pick a medium to large cap company that looks to be around for the foreseeable future, such as JNJ, 3M, GE, or even Exxon. These companies typically raise their dividends every year or so, and this can be a significant portion of your long term gains. Plus, these programs are usually offered with miniscule fees.

Also, have a go at the interest rate formulas contained in your favorite spreadsheet application. Calculate the FutureValue of a series of payments at various interest rates, to see what you can expect. While you cannot depend on earning a specific rate with a stock investment, a basic familiarity with the formula can help you determine a rate of return you should aim for.

Answer 6

Buy gold, real coins not paper. And do not keep it in a bank.