Whether you are five or 30 years away from retirement, budgeting for retirement at any age may make your retirement much more enjoyable. Retirement brings many changes, including your finances. Several factors impact your finances including Social Security, taxes, inflation, rate of return on savings and investments, and personal spending habits. While some of those factors are out of your control, you can still make the most of your current and future spending to help you later in life.
Remember! You cannot live on Social Security alone, so you could find yourself facing a personal retirement crisis if you’re one of the millions who haven’t started saving.* It doesn’t have to be complicated to get a savings plan working for you. Just follow these 6 simple steps to start saving for retirement right now.
1. Prepare a Budget
Budgeting is useful at any life stage. As you prepare your monthly budgets now, be sure to allocate a portion of your income toward your retirement fund. The recommended amount varies depending upon your age, your desired retirement lifestyle, and your current monthly expenses. Find an amount that you can afford, contribute that amount each month, and make a habit of it. You could even set up an automatic payroll deduction with your credit union. This process will take a set amount each time you receive a direct deposit and place those funds into a separate savings account.
2. Open a 401(K) or IRAs tax-advantaged retirement account
If you have access to a 401(k) at work, getting started investing is easy. So first check with your employer to see if you already have an account open. If your employer offers a 401(K), make sure that you contribute a portion of your income towards that plan. Often, employers will match your contributions up to a certain amount, which means you will earn free money on your existing contributions.
If you don't have access to a 401(k) at work, open a traditional or a Roth IRA. A traditional IRA allows you to invest with pre-tax money and a Roth allows you to make tax-free withdrawals during retirement but you invest with after-tax dollars. If you think you'll be taxed at a lower rate in retirement than your current rate, a traditional IRA is usually the best choice.
3. Determine what percentage of your income you want to save
Once you've opened your account, it's time to decide how much to contribute. The maximum you can contribute to a 401(k) is $18,500 in 2018 if you're younger than 50. Maximum IRA contributions are $5,500. Those 50 or older can add $6,000 more to a 401(k) and $1,000 more to an IRA. As long as you keep your contributions below these amounts, it's up to you how much to transfer to 401(k) or IRAs.
4. Automate your investments
Now that you've decided how much to save, tell HR to transfer that amount automatically from your paycheck. The money will be gone before you have a chance to spend it, and you won't have to make the responsible choice every month.
If you don't have a 401(k), you can still set up automated transfers through your bank or brokerage firm. You're much less likely to skip a month of contributing if you have an automatic transfer set up that you'd have to cancel.
5. Research your investment options
You need to put that money you've invested to work for you. If you've opened your account using a managed investment service, you may have little to do other than provide information about your age, retirement goals, and the amount of risk you're comfortable taking. But if you're invested in a 401(k) or have a self-directed IRA, you'll have to make decisions about what assets to buy.
The No. 1 rule is not to invest in anything you don't understand, so no matter what type of account you have, it's important to take the time to research your investment options.
If you're invested in a 401(k), you may have a limited array of investments available and must choose from among options your plan offers. If you're invested in an IRA, you'll have many more choices.
In either type of account, you need to invest at least some of your money in the stock market to earn large-enough returns to build a reasonable nest egg. Exchange-traded funds and mutual funds are both good options for investors without the knowledge or patience to play the market. As you compare ETFs and mutual funds, pay attention to fees, types of assets invested in, analyst ratings, and past performance is no guarantee of future results.
6. Decide on and implement an investment strategy
You don't want to let emotions rule your investments, as this could cause major mistakes like buying assets that are in a bubble. Rather than investing at random, have a specific plan for handling your portfolio.
The most basic fundamentals of your plan should include diversifying investments and managing risk appropriately. For example, a diversified portfolio could be built with stocks, bonds, mutual funds, ETFs that provide exposure to different asset classes with different percentage of your portfolio.
There are also plenty of other investment strategies you could adopt as your own, from value investing or growth investing to dividend investing. It's up to you how simple or complicated of a strategy you want to pursue, but the key is to have some kind of plan and stick with it.
Don't wait to get started
Now that you know how to start investing for retirement right now, you have no more excuses. Take action today to invest for your future. If you invest early, expectations of what your retirement can be are dramatically increased --- but the longer you wait, the more challenging it will be to retire rich.
* Gallup Survey Report --- Americas' Financial Worries Edge Up in 2016, April 28, 2016
These opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individuals. To determine which investments may be appropriate for you, consult with your financial advisor.