Hardly a hot financial topic, but always an important one –- saving for retirement is often relegated to the back burner. The following five reminders are here to help you keep things simple and steady as you save for retirement. That way, you’ll never have to be concerned about what to do after you retire, except enjoy yourself during your golden age.
5 Golden Rules To Save For Retirement
Golden Rule #1: Start Saving If You Haven’t Done So Yet
I remember when I first heard about IRAs, 401Ks and thought…”boring! I’m too young to save now”. Then when the NASDAQ crashed in 2000, I remember how my boss at the current PR firm I was working at came screaming down the stairs saying “save as much as you can when you’re young!” I’ll never forget how insistent he was then. Right there and then, I vowed to start saving as much as possible.
Besides apathy, I think fear of not knowing how to invest your money can really get in the way. Don’t let it –- start socking the money away right now, and get help from your online stock brokerage to find an investing plan. You can start with a safe and basic money market account first, if you’re worried about what to do. Just start getting the money in there.
Golden Rule #2: Save As Much As You Can, When You Can
Ah yes, the daily addictions of Starbucks, your favorite and expensive Whole Foods products, and your love for movies. Or whatever your “vice” happens to be. Chances are, you can cut out all but your most favorite of life’s little pleasures and just put the money you save away for a rainy day, or for those “golden days” when you retire. Not to say that you can’t indulge yourself in a few luxuries, but pay attention to how often and how much you are spending. Perhaps you’ve got a Netflix subscription you aren’t using, or magazines you don’t have time to read; or perhaps you really aren’t using all those cell phone minutes you thought you would. So cut them back.
Expense tracking is a great way to see exactly where your money is going. Fire up Microsoft Excel and create expense categories that make the most sense to you, for monthly expense tracking. After 2-3 months you’ll get a pretty clear picture of where your money is going, and where you can cut back your expenses. Assuming you haven’t maxed out your credit cards and don’t have to worry about erasing debt, any money that you can save should be siphoned into your retirement savings.
Added health benefit of cutting expenses: I will bet that cutting back on any of your extraneous food expenditures will benefit your diet as well! What we purchase as snack foods or dinners out tends to be full of empty calories and useless to our wallets. Do you think Whole Foods desserts are really that healthy? Think again!
Golden Rule #3: Accounts With Tax-Advantages Are The Way To Go
The old-style pension plan was a guarantee for a good life after work for anyone who put their blood, sweat and tears into a company for years. Alas, those days are long gone, and the U.S. financial policymakers designed the tax-advantaged 401K as a vehicle for retirement. And not long after that came the IRA. We now have to fund our own “personal pension” and must save for retirement by getting the most out of these tax-advantaged accounts. The two types to consider are the traditional IRA and the Roth IRA.
Traditional 401K and IRA plans offer you the ability to save your money tax-deferred. You put the money in, and it grows tax-free. Of course you’ll take a tax hit when you withdraw the money after retirement. Traditional plans have the advantage of reducing your income at the time of funding. However you will be heavily penalized if you withdraw from a traditional plan before you reach retirement age; so you wouldn’t think of doing that, right? Good.
Roth IRA plans also offer a flexibility that traditional plans don’t. You will be taxed as the money is put into the account, but down the road you won’t be taxed upon withdrawal. Many see this as a huge advantage due to inflation -– the taxes taken out now will be less than what you’d expect to pay out later, after you cash out your traditional plan upon retiring. Roth accounts also have special Roth IRA withdrawal rules that allow you to withdraw money under certain circumstances without penalty.
Golden Rule #4: Change Your Portfolio to Match Investment Goals
If you start investing during your younger years, time is definitely on your side, as with any type of saving. Not only will you be building up principal and benefiting from the compounding effect of starting early, you also have the opportunity to be more aggressive/growth-focused with your investing strategy. Not that you have to be aggressive, but you don’t have to be as concerned as someone who begins saving for retirement later in life.
If you are someone who has started later — don’t worry, now is better than never. You may or may not want to focus on a moderate to conservative/income-focused strategy with investments (like a low-fee or no load mutual fund) in order to preserve more principal or to hedge your risk in case of a falling market. This more conservative approach can be effective if you prefer an approach to investing that is more hands-off. On the other hand, if you enjoy watching the market more closely, then you might be able to be more aggressive in your plan.
Golden Rule #5: Reassess Your Portfolio At Least Once a Year
At the very minimum, you should reassess your portfolio yearly to make sure you are matching your goals. Of course, paying attention to the general economic status of the United States will also help you tune your investing plans as you go. Now that you’ve got some more tools in your arsenal to go after your financial planning goals for retirement, get to saving if you haven’t already, and adjust your plan as necessary.
David Hamilton (aka FPT Guy) is owner and author of Financial Planning Tips, where you can find information on a wide variety of topics on personal finance. Besides being passionate about his finance blog and helping others keep their finances in check, David also enjoys playing music, staying healthy, spending time with family and friends, and traveling the world.