Wednesday, March 1: Save for Retirement
- Saving now for retirement will ensure you have enough money to have a comfortable standard of living when you stop working or reduce the number of hours you work. Participate in a work-related retirement program, open up an Individual Retirement Account (or IRA), or open a free and easy myRA account. Already saving for retirement? Increase the amount you save toward retirement by 1 percent in 2017.
“The best time to start thinking about your retirement is before the boss does.” Anonymous
That quote above is one of my favorite retirement quotes. However, retirement is less than funny, especially if you are not prepared to do so. In fact, most people worry about having enough money in retirement. But you can roll up a substantial nest egg — even if you don’t make a lot of money during your working years. The keys include learning to budget early in life, sticking with it, saving aggressively during your peak earning years and investing your money wisely and diversely. Saving aggressively for retirement doesn’t mean you have to live on canned beans and ramen noodles.
One thing you must realize is that saving for retirement is a marathon and not a sprint. Some people are overwhelmed by the idea of trying to save because they have so many expenses. I can’t tell you how many times people have told me they can’t afford to save. My response, you can’t afford not to save.
Advice for 20-somethings
• Develop healthy financial habits. That means learning how to budget and how to spend less than you earn. These healthy habits will put you on the road to saving for retirement later and help you financially throughout your life.
• Get out of credit card and/or college debt. Once you have a little bit of free money, you should start investing in a 401(k) or other retirement plans, and start a Roth IRA as soon as humanly possible.
In an ideal world, I’d like to see 20-somethings contribute to retirement plans. The earlier you start, the better. Don’t beat yourself up if you haven’t started. Just know there are several reasons you should start saving for retirement at your first job. You can read about them here.
• Encourage parents to give their young-adult children a leg up. I often find that between living expenses, college debt and saving for a home it can be extremely difficult to save for their retirement. I will often talk to my client’s parents, to see if for a few years they will fund a Roth IRA for their children — even if it is only $1,000 a year.
The combination of tax-free investing and compound interest can have a real impact on their savings.
• Do a budget. I recommend that people try to allocate 50% of their income to living expenses; 30% to taxes and 20% to savings. That savings rate may seem high, but couples who save that amount think of it as normal. If you can’t save 20%, then at least save 10% and try to work up to 20%.
• Avoid taking on too much debt so you can save. Often people in this age group are getting married, buying a house and having children so it’s tempting to take on too much debt.
• Have your retirement savings taken automatically from your paycheck. You can do this at your local bank or credit union
• Save the max in your plan Don’t worry about market volatility.
• Save aggressively. Many people in their 40s are headed toward the peak period for earning and saving. This is the all-business time. You should be thinking about accumulation.
• See a financial planner. This professional can make sure you are on track and tweak your allocation mix.
• Coordinate your retirement savings with your spouse or significant other.
• Put raises and bonuses toward your savings. Part of my yearly bonus goes toward my retirement.
• Focus on smart investing. Make sure you own both U.S. and international stocks in a diversified low-cost manner. You want to be heavily weighted toward stocks as opposed to bonds.
• Figure out how much you’ll need to maintain your lifestyle in your golden years. This can be “a very powerful motivator” for saving.
• Save up to the max in your workplace retirement plan.
• Turbocharge your saving in other ways. This may include getting Roth IRAs and mutual fund accounts. You should have (after-tax) money in accounts that you can use when you are retired and not pay taxes on the money.
For those who are 50 and older
• Save even more than 20% of your net income. This will make up for the years when you weren’t able to save enough.
• Consider reducing your expenses. You might consider downgrading your lifestyle, perhaps selling your house and moving to something smaller or moving to a less expensive part of the country. You can even do a trial run, renting an apartment in the area where you plan to move, to see if you like the lifestyle.
• Get into the habit of living on a fixed income. Save the extra money. This helps you get ready for managing your spending in retirement.
If all goes well and you’ve saved enough, you may be able to retire comfortably in your 60s. If not, you’ve got to continue to play catch-up on savings and come up with ways to earn an income.
Achieving full financial independence so you don’t have to work isn’t easy. However, armed with enough knowledge and time, it is possible.
It’s easy to make small changes that will make a big difference in your retirement savings. Recent statistics highlight the need for some changes: Middle-class people in the USA have a median of $20,000 saved for retirement, far short of the $250,000 they think they’ll need during that time of their lives, according to a new Wells Fargo survey of 1,001 adults, ages 25 to 75, with a median household income of $63,000. (Median means half earn more, half less.)
More tips for saving
• Create a budget. Most people think creating a budget means they’ll be in a “financial straitjacket. They think a budget means deprivation. Instead of thinking of a budget as a list of what you can’t buy, you should look at it as a spending plan of action.
• Cut spending without feeling deprived. Eliminate the things you won’t really miss so you don’t feel like you’re going into “severe restriction mode.” You might stop eating lunch out daily or cancel some cable TV channels that you don’t watch.
If you make one change in how you spend your money today, however small it may seem, you can make a difference in your retirement savings. When you combine several seemingly small changes, they can add up to make a big difference in your retirement savings over time.
• Don’t make minimum payments on credit card debt. It’s a complete financial trap. Minimum payments in the short run mean maximum payments in the long run. It means so much more money in interest. Instead, double and triple the minimum payments.
• Negotiate better interest rates on your credit cards. Don’t be afraid to call your credit card company. It’s a competitive market, which means you have leverage.
• Don’t dig yourself deeper into debt. Change whatever financial behavior got you into debt in the first place. This is something to keep in mind.
Many people end up in debt through no fault of their own. They may have been hit by what’s called “the dreaded D’s — downsizing, divorce, death of the main breadwinner, disability and disease. These are five personal pitfalls that can throw people into debt and limit their ability to save money. In this case, it may take time and patience to dig out of debt.
• Turbocharge your savings. Contribute to your 401(k) plan or other type of employer-sponsored savings plan, especially if you are getting a match, which is essentially free money. You are getting Uncle Sam’s help, too, because you’re not getting taxed on those contributions.
• Consider another turbocharged option. Look into getting an Individual Development Account. This program is available to low- to moderate-income people who want to save toward a specific goal, such as a down payment on a home, college costs or job training. These accounts are supported by non-profit groups, companies and government agencies and provide matching funds. The savings may be matched 2-to-1, 3-to-1 or even more.
• Sell things you aren’t using. Take a look in your basement, attic, garage and drawers and get rid of things you’re not using. Sell them on websites or have a yard sale. This money should be earmarked for savings.
• Take advantage of pretax savings accounts through your employer. These may include flexible savings accounts, health savings accounts, dependent day care flex savings accounts and transportation flexible spending accounts. If you’re going to pay for those things, anyway, you might as well use pretax dollars.
• Plan for the unexpected. Have a financial capability account so that if you have an unexpected house or car repair or medical expense, you don’t have to stop saving for retirement or dip into your retirement savings.
• Learn to cook. One of my favorite non-traditional savings tips for people is to learn to cook. The savings come in many ways: less eating out, buying fewer packaged (more expensive) groceries and possibly eating a healthier diet, which could lead to lower long-term health care costs.