Why you should start planning for retirement now!
What does retirement look like to you? Maybe it’s traveling around the country. Maybe it’s jet-setting to Europe. Or maybe it’s just spending time with your family and all of those projects you will invariably set aside. But no matter what your retirement vision looks like you need to start planning for it. Now.
Retirement may feel like a lifetime away, but whether you just landed your first job or you’re already a few years in, what you do with your money now is going to make a big difference between living the retirement you envision and struggling in your golden years. Let’s take a look at why, and how you can get started.
At what age should I start saving for retirement?
You may not think of yourself as an investor, but planning for your retirement makes you one by default. And the greatest gift you can give yourself as an investor is time. You may have heard that the earlier you start planning for your retirement the better financial position you’ll be in.
Because retirement plans rely on compounding interest. In other words, the interest you earn keeps earning additional interest. Over the course of 20, 30, even 50 years compounded interest can add a significant sum to your retirement plan balance. This is why it’s so important to start saving for retirement when you’re younger and first entering the workforce.
For example, let’s say you start with a $100 deposit into a retirement plan that has a 5% rate of return, meaning your money will earn 5% interest.
After one year, you’ll have earned $5 in interest. After two years, another $5.25. And in the third year you’ll earn $5.51. Your retirement account balance grew by $15.76 just sitting there, thanks to compound interest1.
Let’s make that initial deposit a little bigger and the time frame a little longer. If you put in $1,000 at 5%, at the end of 15 years you will have earned $1,114 in interest – more than your initial deposit!1
You can imagine how that balance will increase even more if you’re making monthly contributions to your retirement account.
In order to take full advantage of compounding interest, though, you need to start saving for retirement as soon as you can. When you land your first job, it’s easy to dismiss retirement planning in favor of more cash in your pocket. Remind yourself that by doing so, you’re robbing yourself of more money later in life.
If you’ve already been in the workforce for some time, understand that it is never too late to start saving for retirement. Working with a Financial Professional can help you build a plan to maximize your retirement plan contributions. Your only mistake would be to continue delaying that first step.
How much do I need to save for retirement?
The most important reason to start saving for retirement is really quite simple: you aren’t going to want to work forever. At some point, when you hit retirement age, you are going to want to (finally) enjoy the fruits of your years of hard work. You’re going to want to travel. You’re going to want to spend time with your family. You’re going to want to pursue your hobbies. You’re going to want to do all of these things and the only way you’ll be able to actually enjoy them is if you’ve invested in your retirement savings.
People often underestimate how much money they will need for retirement. As we live longer and longer lives, we need bigger and bigger retirement accounts to dip into. And all of the everyday costs – let alone all of those retirement plans – often escape our estimations. Let’s play out a scenario. According to Investopedia2, you’ll need approximately 80% of your pre-retirement income to enjoy your retirement years.
Pre-retirement income: $90,000
80% = $72,000
If you are making $90,000/year before you retire, you’ll want to aim for $72,000/year in retirement income.
If you retire at age 67 and live to be 85, that is 18 years’ worth of income you’ll need to have saved.
$72,000 x 18 = $1.2 million
You read that right. You’ll need a retirement account worth at least $1.2 million.
If you panicked when you read that, know that you aren’t alone. Many Americans aren’t on track to save enough to comfortably enjoy their retirement.
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The good news? Now you know and you can start taking action. Here are three steps you can take this week to help get you going.
Log in to your retirement account. Find out how much you have saved, how much you’re contributing and when (is it per paycheck? By Month?), and what your allocations are. You can use this information to help you determine what adjustments you may need to make.
If you have a company-sponsored 401(k) plan, talk to your HR Representative. Find out how much your company matches. If you’re not contributing that max match amount, increase your contribution if possible.
Pull out (or start) your budget. Look for areas of non-essential spending that you can cut. Examples include subscriptions, streaming services, and eating out. Then, funnel that extra cash into your retirement account.
Allocations are simply where the deposits into your retirement account are going: how are the assets you’re contributing being allocated? Retirement plans typically include a mix in how assets are allocated, including lower and higher risk options.
What is the best way to start saving
Before outlining tips on the best way to save for retirement, it’s important to note the distinction between saving and investing. Understanding these two concepts will help you start and build your retirement plan.
Saving vs Investing
One of the reasons people fall short of their retirement goal is that they opt to save rather than invest. Remember the compound interest example at the beginning of this article? You’re not likely to see that rate on your average savings account. In fact, at the time this article was written the average interest rate on a savings account is only 0.06% APY3.
Historically, the average rate of return on a Roth IRA is a more substantial 7% - 10%4. You’re going to reap the benefits of compound interest when you invest your money into products and plans designed for long-term income rather than hiding it away in a savings account.
This is not to dismiss the importance of a savings account. Building up your rainy day fund is critical for emergency expenses, major purchases, and other financial goals. This is to point out, however, that when planning your retirement you should look beyond your savings account.
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One of the most common ways to start saving for retirement is through an employer-sponsored plan like a 401(k). If you have access to one, it’s going to be important for you to get started. Here are three key elements of a 401(k) that make it a great way to prepare for retirement.
Your deposits are automatically deducted from your paycheck. This auto-deposit means you don’t have to remember to do it, and removes the risk of deciding to do something else with that money. You are given the opportunity to choose what percentage of your paycheck you want to contribute. Try to contribute as close to the maximum amount that you can. Remember: the more you are able to contribute now the more secure your retirement will be.
Your company may match your contribution. Many 401(k) plans offer a matching feature, meaning that your employer will match the amount you contribute up to a certain dollar amount. Matching could potentially double the amount you’re putting into your retirement! If you are not able to contribute up to the maximum amount, your next best goal is to contribute the maximum your company will match.
They often include automatic allocation adjustments. Many 401(k) plans include allocations built on the year you plan to retire. These allocations include a mix of investments that vary depending on how many working years you have left. While these automatic allocations make getting started relatively easy, you should still schedule time with a Financial Professional to help you understand if your allocation choices are optimized.
If you’re not sure if your employer offers a retirement plan, touch base with your HR Representative. If a plan exists, they will be able to share the plan documents and instructions on getting started.
If your company doesn’t offer a retirement plan, if you’re self-employed, or if you want to augment your company-sponsored plan, there are individual retirement accounts (IRAs).
You have a few options when it comes to opening your IRA. You will need to decide where to open it, how much to put in it initially, and your asset allocation. Unless you have investment experience, it may be best to talk to a Financial Professional to help you get started.
Once you have your IRA set up, you can use your budget to determine how much you can afford to contribute each paycheck. If possible, set up automatic deposits from your paycheck right into the IRA. Much like a 401(k), this helps you avoid the opportunity to spend the money on something else.
Adjusting Your Retirement Savings
It’s important to adjust your retirement plan as you hit certain milestones. If, for example, you get married or have children you may need to adjust your plan. Similarly, if you receive a raise or promotion at work, you may be able to afford a bigger contribution to your retirement. And if you lose your job, you will want to explore your retirement plan options.
As you age, your asset allocation will also change. Typically, you are willing to take bigger risks with your asset allocation when you’re younger. As you approach retirement, though, you will likely become more risk-averse because you know you will need to start tapping into your retirement account sooner rather than later.
No matter how far away retirement feels, you need to start preparing for it now. Take advantage of time to make the most of compound interest to help you build a secure financial future. Even if you’ve been in the workforce and haven’t started planning, make it a priority so you know your retirement will be taken care of.
Parts of this material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
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