As I’ve entered my late 20’s and begun to solidify my career path in startups, I’ve started to listen to everyone’s advice about saving for retirement. This got me inspired to do some research, ask other startup employees what they do, and try some things out. While I’m not a financial professional, I hope this post gives you a good jumping off point if you work for a startup and you’re wondering about retirement.
Isn’t equity in a startup an investment?
When I was just leaving college I figured I wouldn’t have to worry about it. The way I figured it my equity in one of these startups I worked for was bound to pay off someday, so I could just live paycheck-to-paycheck until that happened. I’ve worked for three early stage startups now, and have a network of friends and mentors who have gone through every stage of growth. One thing has stood out to me from countless conversations: don’t count on equity. First, even a significant amount of equity in an early stage startup will get diluted. Second, exit events are pretty rare, and without one that stock may never turn into cash. Third, employees get “Common Stock” which means that they won’t get any payout until after investors have made their money back and more. But, this isn’t a blog post about startup equity, so I won’t dig into the topic anymore. Suffice it to say that no; equity in a startup is not a good retirement plan. So where should startup employees (or founders) start when it comes to retirement planning? Here’s the process I’ve gone through over the past few years, and I hope it’s a helpful starting point for some of you:
Step 1: Spend less than you make, and start saving
That sounds super obvious, but when I talked to one of my friends about it she wasn’t sure if she was spending more than she made. This is simple to check: just look at your total bank account balance from one year ago and then look at what it is today. Subtract any new debt that you’ve accrued (credit cards, loans, etc.) and that’s where you stand. If the difference is positive, then you’ve spent less in the past year than you’ve made; otherwise, find a way to spend less.
Step 2: Build an emergency fund
Something is better than nothing, so if this whole process intimidates you, start slow. Just open a savings account online and start putting $100 in it every month. Once you get in the habit and you know you’re spending less than you make, build up an emergency fund. This will be a backup plan in case your startup fails, you have a big unexpected expense, or you need cash in a pinch. Most people recommend saving up 6 to 12 months of your salary in an emergency fund. I’m a bit less conservative, so I keep around 4 months of after-tax salary knowing that if I had to I could stop spending as much on certain things or use my credit cards. It also helps that engineering jobs are plentiful these days so I feel less pressure than some others may.
Step 3: Max out your IRA contributions
Once you start investing real money for retirement you’ll start paying real taxes. If your company has a 401k (many startups don’t, but larger ones may), then put in as much money as they’ll match. Otherwise, put up to the yearly max into an IRA. I like the Roth IRA option as it lets me pay taxes on my money now and take it out tax-free when I’m retired, but Traditional IRAs may be better if you think you’ll be in a lower tax bracket when you stop working. Look up the differences here if you’re not sure.
Step 4: Get an HSA if you can
High deductible healthcare plans are the new norm. Whether you’ve got health insurance through your startup or the Affordable Care Act, you may qualify for a Health Savings Account. These are actually really awesome tax-free savings vehicles, especially if you’re young and healthy. The way it works is that any money you put into an HSA is put in pre-tax. Then, as long as you use the money in that HSA for health care related costs (eg: prescriptions, copays, etc.) then you don’t pay tax on that money when you spend it. If you invest the money you have in an HSA and it grows, it could be a significant amount by the time you retire and likely have bigger medical expenses. The other benefit to an HSA is that if you do get sick or injured before you retire and your health insurance won’t cover everything, that money can be used without penalty (or taxes) before you’re 65 since you’ll use it on medical expenses. It’s like a medical emergency fund mixed with a retirement fund.
Step 5: Move your money into index funds or hire a fiduciary
IRAs, 401ks, and HSAs are basically wrappers for the money you want to save for retirement. That means they don’t inherently earn interest, but because most people won’t be touching the money for a long time, they put their IRA, 401k, or HSA money into an investment like stocks or bonds. The reason for this is that compound interest is very powerful. If you’re completely in over your head at this point, then it might be worth hiring a fiduciary. Don’t just look for the first financial advisor you can find though. Registered fiduciaries are different in that they work for you and don’t get commission from selling you certain investments. Beware financial advisors who aren’t fiduciaries. They’re probably just glorified sales people. If you feel strong - like you can handle this yourself - then look into index funds. These funds let you buy a large swath of stocks or bonds, giving you instant diversification without the work or buying individual stocks yourself. Read up on diversification of funds too though because the mix you buy when you’re 25 may be very different from the mix you should buy at 45. There’s much more that could be said on this topic, but since this is getting more advanced, I’ll leave you to do your own research if you’re interested.
I read a couple good books on the topic of saving money and investing this year: Money, Master the Game by Tony Robbins (I know, I was skeptical of Tony Robbins too, but it’s legitimately a good book) and Rich Dad Poor Dad by Robert Kiyosaki. A couple blogs I’ve found helpful are NerdWallet and Vanguard’s blog. Finally, if videos are more your thing, check out How the Economic Machine Works and John Oliver’s spot on retirement plans and the danger of financial advisors. Have your own tips for startup employees looking to save for retirement? Hit me up on Twitter and I’ll add them here. Disclaimer: this should be obvious, but I’m not a financial advisor, fiduciary, or even a professional in the industry, so take my advice with a big grain of salt. I’m just an engineer who works at startups and wants to retire someday. Use my advice as a springboard to do your own research or talk to your own financial planner.