American workers saving and investing for retirement have many options, but often focus on short-term necessities instead of prioritizing the goal of planning for the future.
Dave Ramsey, the personal finance bestselling author and host of The Ramsey Show, offers his recommendations on one important strategy that can help people tackle the problem with clarity about how to approach the challenge.
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Many people have employers that offer 401(k) plans with matching contributions for retirement savings. The tax-deferred growth these plans offer are a major incentive for using them.
Individual Retirement Accounts (IRAs) are also popular investment tools for retirement planning. Traditional IRAs offer growth that is tax-deferred. Roth IRAs feature the ability to make withdrawals in retirement that are free of taxes.
Related: Dave Ramsey warns Americans on Social Security, Medicare growing problems
In addition to these tools, some people invest directly in stocks and bonds, usually with a diversified portfolio that minimizes risk over the long term.
Ramsey has some insight for workers planning for the future on what he believes is an effective method for approaching the task.
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Dave Ramsey bluntly explains investing in mutual funds
Ramsey acknowledges that people often get confused by all the details around mutual funds, but offers some straightforward steps that can make investing in them easier and less complicated.
“First, take a deep breath,” Ramsey wrote. “Once you get past all the fancy investment jargon, you’ll see that mutual funds really aren’t all that complicated.”
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Ramsey makes an analogy to simplify the concept. He suggests thinking of some people standing by a bowl, and all of them putting a set amount of money in it. Those people just “mutually funded” the bowl.
With mutual funds, it is stock in a diverse group of companies that a mutual fund purchases, and an investor buys a piece of the fund.
The personal finance coach recommends that people begin by calculating their budget for investing in mutual funds, preferably using 15% of their income.
Ramsey clarifies his belief that a company matching 401(k) is a great place to start. Once a person maxes out their company match on their income, a Roth IRA is the next place to complete the remaining portion of the 15%.
While a Roth IRA has lower contribution limits than a 401(k), a worker is not required to pay taxes on the money they withdraw from it after they retire.
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Dave Ramsey emphasizes where to look for mutual fund performance
Ramsey says a mutual fund is sufficiently diversified when it invests in a wide range of sectors, such as technology, financial services and health care.
The past performance of a mutual fund is important to research. Ramsey recommends looking at long-term results, rather than getting caught up in current short-term trends that are making news and getting attention on a given day.
He defines long-term results as 10 years, or even longer when possible. One important way to assess a mutual fund’s strength is to find those that have superior performance over other funds in their same category.
Ramsey recommends another important strategy that involves investing among four types of mutual funds: growth and income, growth, aggressive growth and international.
The goal here is to achieve balance that helps to reduce risk. The stock market’s volatility can at times be very rewarding and at other times be dangerous.
“When it comes to investing, the last thing you want to do is treat your retirement portfolio like the Kentucky Derby and bet it all on one horse,” Ramsey wrote.
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