How to Start Saving For Retirement
Retirement doesn’t have a cookie cutter plan that will work for everyone. That being said, I am most concerned about Millennials (that means my generation) and our finances in retirement. I’m not going to blame politics, social security or the pity party our generation is throwing about student loans in this article. We keep it classy here and you can find that on other sites.
Instead, what I want to focus on is that statistics show that many of us are seeking higher education, which means we are starting the workforce later in life. For example, I did not start a full-time job until I turned 26. That means we are losing precious time since we are starting our jobs later in life. Your best advocate when saving for retirement is TIME.
Our generation is bogged down with more debt and we are statistically underemployed. This means that we are making less money than others in the past with the same level of education that we’ve obtained. So we have a few things not on our side: Less Time, Lower Income and Higher Debt.
We also have parents that may have had their own retirement hit hard a little under a decade ago. Planning for our retirements is now even more important because we may even find ourselves needing to assist our parents more than previous generations. Retirement, like student loan debt, needs to be taken seriously. Here are a few things you should consider when you’re trying to learn about saving for retirement.
How to Start Saving For Retirement
1. Maximize an Employer Match.
Some employers will match dollar for dollar up to a certain percent, some will match 50% of your contributions up to a certain percent…but whatever it is…make sure you take it. I cannot stress enough that this is FREE MONEY! At a minimum, contribute up to the max amount of the match. Your future self will thank you.
Don’t quite understand what I mean? If your employer will match 100% of your contributions up to 6%…that means that if you make $40,000 a year, 6% of your salary is $2,400. So if you contribute $2,400 to your retirement account that year, your employer will throw in an EXTRA $2,400 to your account. (If you contribute 10% which comes to $4,000 your employer will still match just $2,400) If they will contribute 50% of your contributions up to 6%, then if you contribute that same $2,400 your employer will throw in $1,200. That is a lot when you think about it, because ideally if you invest it well, and it will grow each year until you retire.
2. Consider a Roth IRA/401(k).
Putting the word “Roth” in front of an IRA or 401(k) means that you are paying the tax on the income first, then you are putting the money into retirement. If you have a non-Roth retirement account, you will be paying tax when you pull the money out of the account, that means not only on the amount you put in, but also on the growth of the money you’ll be receiving over the next 30 years.
3. Automate Your Retirement.
If you haven’t noticed…I’m all about automating your financial goals. Whether it’s paying down debt or saving money…automating your goals is awesome. Automate your retirement, just like you automate your bills and your savings account. If you don’t have a 401(k) with your employer (or something similar depending on the entity you work for) you can set up your direct deposits to deposit into an IRA, just as you do your checking account.
4. Set up a Roth IRA
Don’t Have an Employer Match? That’s Okay! I didn’t either until I was 28 (or 3 months ago…however you want to think about it). Set up a Roth IRA (I use Charles Schwab) and you can still automate your retirement to go straight into your retirement account. If you’re self employed you can set up a self employed account (SEP). Note: If you don’t have income (example: if you’re a stay at home mom) you can’t put money into a retirement account.
5. Use a Financial Calculator
How Much Money Do I Need to Retire? There is no crystal ball in the world that can tell you exactly how much you need to retire. There are so many factors, but there are some great calculators out there to help as well. Here is one from CNN money. Start with 10% if you’re in your 20’s and still struggling with other obligations. If you’ve paid off your debt, bump it up to 15% or 20%! How much you need at retirement has a lot to do with what you want your lifestyle to be like in retirement. Do you plan on traveling a lot? Or do you plan to enjoy living in relaxation and reading at home?So the answer to the million dollar question “How Much Money Do I Need To Retire? It depends. (which is a completely satisfactory answer for a lawyer)
6. Do NOT Borrow From Your Retirement Account.
Please, oh please….don’t do it. I believe borrowing from your retirement account is equal to (or worse than) not putting money in retirement at all. You’re putting that money away because you will need it some day, and even worse borrowing early will likely result in penalties and fees.
7. Make Your Retirement a Priority No Matter What.
Generally Retirement is Creditor/Bankruptcy Proof. I’m making a very generalized statement here, please see a bankruptcy attorney or financial adviser regarding your circumstances. Here is the deal, if you are struggling with mountains of credit card or medical debt, this is the ONE thing I would tell you to put money towards prior to trying to pay down that debt. I believe you should continue to put money towards your retirement in these circumstances because you will need that money later on. If you file bankruptcy, you’ll never get a refund for those payments you made to your existing credit cards…but if you’ve put money in a retirement account, you may still have that money in the end (that means it is “exempt” from bankruptcy).
Note: Did you know now is a great time to put more money into a IRA? You can contribute money up to April 18th of 2016, and count it towards your 2015 retirement maximums!