Effective Tips for Retirement Savings

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They say that a journey of a thousand miles starts with a single step. The same can be said for retirement planning.

How much have you contributed to your retirement so far this year? Will you have enough to live on for the last twenty or thirty years of your life? If you are like most people today, the answer is somewhere between “not enough” and “I’ll never retire at this rate!” The lack of retirement savings by Americans is a growing crisis now that a mere 28% of millennials have more than $10,000 saved and 42% of millennials have no retirement funds at all. Still worse, 31% of Generation X between the ages of 35 and 54, now closer to retirement, haven’t saved anything at all.

It is easy to see why so few have retirement funds tucked away as we all feel the weight of student loans, healthcare expenses, rising home prices, and the lure of instant gratification. A secure retirement, however, is really just a matter of careful long-term planning. While the number of Americans without savings is alarming, it is also true that 25% of workers over 55 have more than $300,000 saved—showing the real power of long-term planning. So how can you put yourself in that 25% who can retire confidently at 65?

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Plant a Seeds Early to Grow your Retirement Forest

The true key to investing for retirement is to start early, start small and let compound interest grow your wealth. Don’t wait until you have your dream job, pay for your house, or put your children through college. Start investing $100 a month in your retirement at 35 years old in an index fund (average historical return of 7%) and you will have $122,000 by the time you’re 65. But put away that same $100 a month starting at age 20, and by the time you retire, it will have grown to around $368,000. For the price of a night out at the movies or a few coffees at Starbucks you could be planting the seeds for a secure retirement. Thanks to compound interest, a few hundred dollars invested young are better than thousands when you’re older.

Estimate your Financial Needs in Retirement

While it’s true that we tend to spend less during retirement, it is also important to have a clear idea of your anticipated expenses in retirement. Knowing this number will give you a goal to shoot for in your investment plan. Try out this withdrawal calculator from Money-Zine that calculates how many years your money will last consider your monthly spending and the continued interest on your account. The average cost of retirement reported by USA Today is $738,400, but it is far more essential to know your individual financial needs. The commonly cited figure is to plan to spend 70% of your current monthly income during retirement. If your monthly expenses come to $3,000 today, for example, you will need to have enough saved to draw $2,100 from your account every month throughout retirement.

It’s All About the Planning

Now that you’ve calculated your magic number for financial independence, you need to make a plan to achieve that goal. Create a monthly budget by first carefully tracking your spending, then building in a set percentage of retirement savings every month. A common rule of thumb is 15% of your income invested for the long-term, but like everything else, this will vary. Early on, focus on the stock market in a Roth IRA (using the after-tax money) and an employer-based plan to aggressively grow your portfolio, then transition to more stable bond funds when you near retirement age. Don’t worry if the stock market dips early on. In fact, market downturns when your account is just getting started means you get to buy stocks at a discount since they will likely go up from there.

Enroll in Employer-Based Plans

Decades ago, many employers offered permanent pension plans. In 1978 the Federal government introduced the 401K plan that allows workers to save tax-free for retirement through plans linked to their employment. The 401K was meant to supplement both employer-based pensions and Social Security, but with time employers realized they could cut costs by eliminating their pension programs entirely, leaving most Americans with only 401K plans and Social Security.

If your employer offers 401K or 403B plans with matching funds, the smartest move you can make is to enroll today and contribute as much as you can afford as long as the funds are matched. Every employer is different, but one typical contribution match is 50% of your contribution up to a maximum of 3% of your salary. Any matching funds from your employer are essentially free money that will grow (not subject to tax) until you withdraw it in retirement. Such plans not only offer tax benefits but make investing easier psychologically too, since the money is deposited in your 401K or 403B before it ever hits your bank account.

Don’t Be Afraid to Ask

If you’re not a financial expert, the list of questions you may have might seem endless. What is the difference between a Roth IRA and a 401K or traditional IRA? Which is better? What are mutual fund fees and how much is normal? Should you focus on paying down debt or investing in retirement first? The list goes on.

It’s true that starting your retirement journey can seem confusing and the first steps you take to financial freedom may seem daunting, so don’t be afraid to look for help. Sitting down once or twice early in your career with a certified financial planner can set you on the right path for life and mean tens of thousands or even hundreds of thousands of dollars more in your account over a lifetime.

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Do you have a plan for retirement?

10 thoughts on “Effective Tips for Retirement Savings”

  1. although I love Oprah, not sure she is doing her own financial planning? Jessica Alba? Well, she’s rich, but what an odd choice. Seems that most people out there agree. Although I did save for many years (save for the tough freelance years), I wish I would have done more. You can’t turn back time, but yes, you feel like you have to put a TON more money in now.

    • The sooner you can start the better. Something I’m trying to teach my three teenagers because if you don’t you end up playing catch up years later.

  2. Enrolling in employer-based plans is important, but equally important is staying in them. Too many people, when they leave an employer, cash out their 401(k)s instead of rolling them over, thus setting themselves back to square one.

    • Great point Gary, if you cash out a 401k early you lose all the years of momentum you built up and typically get hit with a hefty tax bill too.

  3. “For the price of a night out at the movies or a few coffees at Starbucks you could be planting the seeds for a secure retirement.”

    Thank you, Brian. It doesn’t take much money to set yourself up for a successful retirement if you start saving early. And I love the infographic. Very informative.

  4. I think the big change that has happened is that shift from secure pensions to self-funded pension planning. It’s alarming that a third of Generation Xers haven’t saved anything. I wouldn’t be surprised if they grew up with parents who had secure pensions, and they just haven’t recognized that they have to plan differently. I don’t like to think of what lies ahead for them.

    • It is a big change, that could leave many in a bad spot if they don’t get onboard soon. I saw my companies sponsored pension be dissolved after it was in place for many years.

  5. Good advice, socking away money in the 401K helps a lot. I think a big part also comes down to learning to save, in part I was able to retire when I did because I lived simply and saved, I notice my kids (Gen X) have a harder time foregoing trips, nice things, etc and much smaller % of salary than I did at their age.

    • Very true Matt. Building that saving habit can be tough for some. It eluded us for years until we broken our bad money habits and learned to delay gratification.

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