If you’ve followed Penny Pincher’s advice in her post on retirement planning before you turn 30, congratulations, you are probably well on your way to accumulating assets for that day when you will retire.
Even if you’ve been distracted by life and suddenly you’ve reached age 30 or even 40, fear not — it’s not too late to start saving for the day when you can work for fun (or not at all).
Here are some steps that you can take that will put you on the path to saving for your future.
Create a monthly budget.
Thirty- and 40-year olds are in their earning prime, and the key to successful retirement and financial planning is discipline. Create a household budget and stick to it. Be sure to plan for the unexpected, because that’s what happens in life. Your budget should include discretionary funds left over after you’ve paid bills and met other monthly obligations, including setting aside a percentage of your income for retirement.
If your budget doesn’t include saving for retirement, think about areas where you could save some money after everything is paid. Can you forego premium cable channels or combine your car and homeowner or renter insurance policies to get savings? Use discretionary funds to “reward” yourself for sticking to your budget and retirement saving plan by doing something special like going out for dinner or to a sporting or theater event.
But remember — if you can’t afford it, don’t buy it.
Save, and save some more.
Do you have access to retirement savings vehicles other than Social Security? Let’s face it, a retirement based on income from just Social Security isn’t going to be one that you’re going to look forward to.
Does your employer offer a retirement savings plan like a 401(k), 457, or 403(b)? If so, start contributing – now. Begin by contributing the minimum and step up your contributions every year. Will you be getting a cost of living or merit increase this year? Think about setting aside an additional percentage or two as your paycheck increases.
If your employer doesn’t offer a retirement savings account option, check with your credit union or bank to see if you can set up an Individual Retirement Account (IRA). Do your homework and be sure to ask about the fees associated with having someone manage your money for you.
If you are a public employee, your employer may offer several tax-deferred retirement plan options in addition to a traditional defined benefit retirement plan – again, look for how much it costs to participate in the voluntary or supplemental plan. The higher the fees are, the less money you’ll have to compound over time – and fees really do add up.
If you should leave your employer, do not withdraw your retirement account to pay bills — no matter how tempting that pot of money may be. These contributions were made before you paid taxes on them, so when you withdraw your money, you will be subject to substantial taxes. Consider rolling over your account to your new employer’s plan or to an IRA – that way, you won’t have to start over and can continue investing for retirement.
Long journeys begin with a single step.
Think of saving for retirement as a path to the future. By starting now, it will be easier to reach your destination. Use this CNN Money Web calculator to see how much you should be saving to meet your goals for retirement. For most people, seeing this result may lead to fear — or worse yet, inaction.
Fortunately, there are those who have dedicated their careers to helping others plan and prepare for retirement. That’s a good resource to tap. Experts at the Center for Retirement Research at Boston College have published a report entitled, appropriately, How Much to Save for a Secure Retirement. This research contains suggested savings rates for people with a variety of variables that include the age you start saving and how long you plan to work.
Even if you are not quite at the retirement savings levels recommended by Boston College’s retirement pros, don’t worry. In your 30s and 40s, you still have time to take advantage of compounding interest and the fact that you are a decade or two or three away from actually retiring.
Check in every now and then.
It’s human nature to avoid bad news, but successful retirement planners adjust their game plans as life happens. Monitor your investment account at least quarterly – sign up for automatic account rebalancing, or if you are not comfortable with deciding where to invest your money, consider directing your savings to a target retirement date fund where the rebalancing and asset allocation is done for you as you get older.
After you take care of yourself, think of others.
An important aspect of financial planning involves those close to you. Do you have a spouse or children who would be left worse off financially if you should die? I know, that’s pretty harsh, but it’s something that you should keep in mind as you build your financial plan. Make sure your beneficiaries are up to date. Consider using a professional financial planner to assist you in getting your financial house in order.
Does doing all this still seem daunting? Remember the Nike ad campaign of yore? “Just do it” and your financial future will be one less thing you need to worry about.
Sources for infographic:
The Sandwich Generation on Pew Research
Student Debt Hits the Middle-Aged on Wall Street Journal
Parents, Get Your Financial Life in Order. Then Talk to Your Kids. on AARP
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