Retirement probably feels a long way off. It might be at the bottom of your list of savings goals – if it’s on there at all – because you'll have plenty of time to think about it later, or you’re focused on paying down debt, or because you just have no idea where your money is going every month.
It’s time to set excuses aside and jump-start your retirement savings. Your future self will thank you if you do. Here are some steps you can take to get yourself on the right path:
Start saving now – Warren Buffett has called compounding interest “the eighth wonder of the world.” Maximize the amount of time your savings have to grow by starting as early as possible. Simply starting to plan for retirement now and putting away whatever amount you can will put you at a greater advantage later down the road.
Take stock of your monthly cash flow – Use a budget to set priorities for where your money should go. Take inventory of all income and expenses, keep track of all debt (credit cards, student loans, etc.) and once you have done that, then decide what portion of your income you can afford to contribute towards a retirement plan. Make sure you already have an emergency fund in place; this should be 3-6 months’ worth of living expenses to protect you in those times when, you know, life happens.
Open an Individual Retirement Account (IRA) – An IRA is a tax-deferred account to help you build your very own nest egg for retirement. There are two different types of IRAs:
Traditional IRA: Your contributions to a traditional IRA are tax-deductible; you pay no income tax now, only when you withdraw the money in retirement.
Roth IRA: Your contributions to a Roth IRA are post-tax; you pay the income tax now, not when you withdraw the money in retirement.
The maximum you can contribute across the two types of IRA is $5,500 per year, or $6,500 once you hit age 50. If you’re early in your career, it might make more sense for you to be contributing to a Roth while your income (and thus your tax bracket) is relatively lower. Later in your career, the traditional IRA might be the wiser choice.
Contribute to your 401(k) if your employer offers a match – If you have a 401(k) through your employer and they offer a match, take advantage of this benefit. Contribute at least enough to get the full match - this is money that would otherwise be left on the table. Money that you contribute to a 401(k) is typically pre-tax, which means you pay less in income taxes this year.
Assess your investment fees and options – Whether you’re saving inside a 401(k), 403(b), IRA, or something else, it’s a good idea to understand how you’re invested and what fees you’re paying. Investments carry a range of risk, with high risk correlating to high potential return. The general rule of thumb is that younger people can invest in riskier investments because they have the long timeframe to handle the ups and downs of the stock market. Hitting age 40 or having at least $100,000 in investment assets is a good trigger point to put more risk management in place.
Additionally, look up your investments’ fund fees using a website like Morningstar, and opt for funds with no front-end loads and lower expense ratios. Do your research – these fees can add up to a huge amount over time.
Don’t feel daunted if this seems overwhelming – just find a way to get started, even if it’s a small amount per month. Building the habit of saving is half the battle. If you feel like you need help, consider talking to a fee-only financial planner to get personalized advice on what steps you should be taking. By saving a portion of your income now and setting it aside for retirement, you can safely prepare for a long and happy future!