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How I'd Invest $50,000 for Retirement if I Had to Start From Scratch

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For most people, $50,000 is a meaningful amount of money, especially when it comes to investing for retirement. At the same time, knowing how to invest prudently puts you in a position to both maximize your financial capital and sustain a desirable lifestyle later in life.

Here, I’ll outline how I’d invest $50,000 if I were to start from scratch today.

A few key assumptions

It’s impossible to outline how I’d invest the money without making a few key assumptions. Let’s take the following factors as given:

  • I already have an adequate emergency fund. Before investing aggressively, it’s vital to establish a liquid emergency fund, typically enough to cover three to six months of living expenses. In reality, I’d keep closer to a year’s worth, but some people are comfortable with less.
  • I am at least 20 years from retirement. Investing for pre-retirees and retirees looks very different from investing for people who still have years in the workforce. For this exercise, we’ll assume I’m either early or mid-career and want to invest for the long term.
  • I have no other retirement money at the moment. Again, it’s impossible to make a judgment on retirement investing if we look at any one account in isolation. To make a more informed decision, let’s pretend this lump sum is the only money I have at my disposal.
  • I’ll use a sample asset allocation of 90% stocks and 10% bonds. In the end, this means I’ll end up with $45,000 worth of stocks and $5,000 worth of bonds. Given rising interest rates and unusually high inflation, an asset allocation overweight in bonds is hard to argue for, especially over the long run.

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Step 1: Fully fund a Roth IRA

If I can fully fund a Roth IRA up to the IRS-defined limit ($6,000 in 2022 or $7,000 if you’re over 50), that’s my first stop. I’d immediately deposit the full contribution amount of $6,000 and invest in a simple, low-cost index fund that covers the broad market like the Vanguard Total Stock Market Index Fund.

Other than setting all capital gains and dividends to reinvest, I’d then direct my attention to my employer-based account.

Step 2: Max out my retirement plan at work

Whether it’s a 401(k), 403(b), or even a solo 401(k), making the most of your workplace retirement plan is a great next step. Since you’re able to contribute more to a workplace plan in 2022 ($20,500 for 2022 or $27,000 if you’re over 50), I’d ensure the full contribution takes place. Contributing this much also ensures you’ll be eligible for a matching contribution (if offered), which just ends up as more retirement money.

For a long-term investor, this means contributing $20,500 to your 401(k). Of that money, I’d invest $5,000 into a broad-based bond market mutual fund (in keeping with our asset allocation) like the Vanguard Total Bond Market Index Fund.

Then I’d invest the remaining $15,500 in the Vanguard Total Stock Market Index Fund. Keeping things diversified, low-cost, and as simple as I can possibly make them is the overriding factor in creating a new investment plan.

Image source: Getty Images.

Step 3: Open a taxable brokerage account

Since I’ve already used $26,500 of my available money, I’d still have $23,500 to allocate to a taxable brokerage account. Since I’d like to add international stocks to my portfolio, I’ll use $15,000 of my remaining money (one-third of my stock allocation) to buy another low-cost exchange-traded fund (ETF). One that comes to mind is the Vanguard All-World ex-US ETF, which gives me global exposure to a ton of international stocks and provides further portfolio diversification.

With the remaining $8,500, I’d invest in the Vanguard Total Stock Market ETF and call it a day from there. Note that this is the ETF version of the mutual fund mentioned earlier, so it’s essentially the same product.

Taking a bird’s eye view

When all is said and done, I’d have $5,000 in a total bond fund, $15,000 in a total international fund, and $30,000 in total stock funds. What’s more, I’d also have the money spread out across accounts in a tax-optimized fashion, so I’d know every single dollar was working to its maximum capability.

An important takeaway here is that you should consider making things extremely simple and easy to manage, so you don’t spend precious time tinkering or changing things around. This is valuable time you could use to do any number of other things. Setting your retirement allocation on autopilot while only revisiting it to rebalance or add funds is a smart way to handle your investments, so think carefully about how you set them up from the get-go.

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Sam Swenson, CFA, CPA has positions in Vanguard Bond Index Funds – Vanguard Total Bond Market ETF, Vanguard FTSE All-World ex-US ETF, Vanguard Total Stock Market ETF, and Vanguard Total Stock Market Index Fd Admiral Shs. The Motley Fool has positions in and recommends Vanguard Total Bond Market ETF and Vanguard Total Stock Market ETF. The Motley Fool has a disclosure policy.