How much have you saved for retirement?
If that question sends you spiraling into a panic, this article is for you. The fact is, most people don’t have enough saved to retire – many haven’t even saved a dime. And that has nothing to do with laziness or being “bad” with money, either.
So how do you save for retirement on top of paying your rent or mortgage, healthcare costs and saving for your child’s college expenses? Some days, it doesn’t even seem like there’s enough left for a new pair of shoes.
First, ignore all of the terrifyingly unrealistic advice from morning show money experts who blithely tell you to have at least one million dollars saved by 65. Yep, sure thing. On it.
Here’s all you need to do: Simply start. Take it a day at a time. Putting one foot in front of the next toward building a nest egg already puts you ahead of the curve.
Saving enough to retire is far from easy, but it’s also not as complicated as most people make it sound.
Like many things, investing can be as simple or as complex as you want it to be.
The important part is committing to a plan and consistently following it.
So take a deep breath and get ready to start planning for the future. You’ve got this 💪
The two most popular retirement accounts are IRAs and 401ks.
An IRA (or Individual Retirement Account) is an account that any individual can open and contribute to with earned income.
However, 401ks are employer-based retirement accounts with contributions deducted from your paycheck. Many employers also often match the contributions to 401ks, giving their workers an extra boost in their retirement savings.
Both IRAs and 401ks come in two modes: Roth and traditional.
Contributions from Roth IRAs and 401ks are not deductible on your taxes, but withdrawals can be made tax-free during retirement.
Contributions to traditional IRAs and 401ks are tax-deductible, but withdrawals will be taxed later on.
The contribution limit for 2018 for IRAs is $5,500 per year or $6,500 if you are 50 or older, while the limit for 401ks is $18,500 or $24,500 in “catch-up” contributions for anyone age 50 and older.
The IRS sets these limits, so you aren’t allowed to go over them.
Many experts agree that a Roth account is often better for young people just starting their careers, while high-earners would likely benefit most from the tax perks of a traditional account.
For example, if you’re making $35,000 a year, you’ll benefit more from a Roth IRA than someone making $350,000 with a traditional IRA (and who needs more tax deductions).
Many companies contribute to their employees’ 401ks, usually as a percentage of what each employee puts in.
Most require that the employee contribute a portion of their own earnings before receiving a free match from the company.
Unfortunately, about a third of employees don’t contribute enough to earn the full employer match, according to a 2013 survey from the American Benefits Council.
According to the Society for Human Resource Management, the most common employer contribution is a dollar-for-dollar match. Every dollar you put in, your employer will put in too.
Some companies have a vesting schedule where employees earn ownership of the employer contribution each year they work, often working for several years before receiving 100% of the employer contributions.
For example, if you work at a place that gave you 20% ownership every year, you’d have to work there five years to get 100% of what the employer put in.
Ask your HR department about the employer-sponsored retirement plan and what it entails.
Setting up a meeting to discuss your benefit options might sound like a slog, but it shouldn’t take long for any competent HR professional to explain your options in simple terms.
In general, you should try to save between 10-15% of your income for retirement.
If that figure seems impossible to reach, start with what’s realistic and increase that amount every year – or any time you get a raise.
Start with 5% and increase it when you can. If your employer offers a matching program, try to reach that if possible.
To find more money to put towards your retirement, go through your spending from the last six months and see what you can cut.
The more money you invest now, the better off you’ll be in retirement.
If you’re worried about saving enough, talk to a qualified financial planner.
They’ll go over your assets, examine your situation and help you create realistic goals.
Most financial planners can create a plan for you to follow, so you only pay a one-time fee instead of a monthly expense.
Try to spend $500 or less on a financial planner for a one-time plan. You can also use a robo advisor like Betterment or Wealthfront for an even cheaper solution.
Once you’ve set up an IRA or 401k, it’s time to starting deciding how you want to invest.
Target date funds are one of the most basic ways to invest. These funds automatically rebalance their allocations the closer you get to retirement, so the funds will grow more conservative as you age.
It would be like if your child had a magical book that started out as a picture book when they were toddlers and automatically grew more advanced as they got older, fitting their reading level.
When you start investing in your 20s, you want to be aggressive and target lots of stocks. As you get older, you want to choose more bonds, which are less volatile. Think of target-date funds as “set it and forget it” investing.
These funds are organized by the year in which the investor hopes to retire and are divided by five-year increments. A 25 year-old would most likely choose a 2055 or 2060 target-date fund if they want to retire between 65 and 70.
Ok, once you know you need to invest, here’s how you choose what to actually invest in – the specifics.
First, you need an asset allocation plan. An asset allocation plan is like your roadmap – it tells you how to choose investments for your retirement account.
By deciding which asset allocation model to choose, you’ll know what kind of assets to pick.
Asset allocation models are divided by their risk tolerance, or how aggressive you want to be as an investor. “Aggressive” has a negative connotation in real life, but in investing, being aggressive is good if you’re young.
It means you’re investing in stocks, which have the potential to grow more rapidly than bonds, which are typically more stable. As you grow older, you’ll likely want to become more conservative with your money as you approach retirement.
You can choose your asset allocation model manually (see below) or use a robo advisor, like Betterment or Wealthfront, to do it for you.
Here are the most common asset allocation models. The stocks mentioned in these can be a blend of domestic and international stocks as well as large, medium and small companies.
|Asset Allocation Model||Stocks||Bonds|
Now that you know what asset allocation model to choose, it’s time to pick your investments.
Index funds are a great place to start. Index funds are a favorite for investors looking for diversity in their portfolio, which is the total sum of all your investments.
An index fund is like a huge basket of different companies that are all included in one pile. An index fund tracks an entire index so you get a broad swath.
For example, an S&P 500 index fund will mimic the S&P 500, which includes the biggest 500 companies in the country. The S&P 500 is like the pulse of the equity market and the broader economy.
Generally, when companies in the S&P 500 do well, the market will do well and so will your investments.
It’s also important to buy investments that have low fees, usually much less than 1% of your investment. The lower the fees, the more you’ll retain of your investments and any potential returns.
To pick the right funds, you can use a robo advisor, do research yourself or hire a financial planner through the National Association of Personal Financial Advisors or XY Planning.
A qualified advisor will be able to explain their investment strategy and show you how to keep doing it on your own.
So this was a lot of information to take in – are you still with me?
Remember, it’s not about doing everything at once, it’s about simply starting. Every day – or week, if that feels more realistic – take 15 minutes to put some effort towards your retirement, from emailing your HR department about the 401k or calling a potential financial planner.
A few minutes here and there will make all the difference down the line.
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Zina Kumok is a personal finance writer whose work has appeared in Learnvest, DailyWorth and Investopedia. She is a former newspaper reporter and writes a blog about paying off her student loans in three years at Debt Free After Three. She lives in Indianapolis with her husband and two rescue dogs.
This material is designed to provide general information on the subjects covered. It is not, however, intended to provide any specific legal or investment advice or to serve as the basis for any decisions.
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