You know you should start saving for retirement before you turn 40. What can you do today to make that effort more productive and improve your chances of ending up with more retirement money, rather than less?
Structure your budget with the future in mind. Live within your means and assign a portion of what you earn to retirement savings. How much? Well, any percentage is better than nothing – but, ideally, pour 10% or more of what you earn into your retirement fund. If that seems excessive, consider this: you are at risk of living 25-30% of your lifetime with no paycheck except for Social Security.
Saving and investing 10-15% of what you earn for retirement can really make an impact over time. For example, say at age 30 you set aside $4,000 for retirement in an investment account that earns an average of 6% a year. Even if you never made another contribution to that retirement account again, that $4,000 would grow to $30,744 by age 65. If you supplant that initial $4,000 with monthly contributions of $400, that retirement fund mushrooms to $565,631 at 65.1
Avoid cashing out workplace retirement plan accounts. Learn from the retirement savings mistake too many baby boomers and Gen Xers have made. It may be tempting to just take the cash when you leave a job, especially when the account balance is small. Resist the temptation. One recent study (conducted by behavioral finance analytics firm Boston Research Technologies) found that 53% of baby boomers who had drained a workplace retirement plan account regretted their decision. So did 46% of the Gen Xers who had cashed out.2
Instead, arrange a rollover of that money to an IRA, or to your new employer’s retirement plan, if allowed. That way, the money can stay invested and retain the opportunity for growth. You also can avoid taxation and penalties on the balance withdrawn. For example, say you cash out a $5,000 balance in a retirement plan when you are 25. If that $5,000 stays invested and grows 5% per a year, it becomes $35,200 some 40 years later. Today’s $5,000 retirement account drawdown could amount to robbing yourself of $35,000 (or more) in retirement savings.3
At a minimum save enough to get a match. Some employers will match your retirement contributions to some degree. You may have to work at least 2-3 years for an employer for this to apply, but the match may be offered to you sooner than that. The match is often 50 cents for every dollar the employee puts into the account, up to 6% of his or her salary. Other than the exception of an inheritance, an employer match is the closest thing to free money you will ever see as you save for the future. That is why you should strive to save at a level to get it, if possible.4
Saving enough to get the match in your workplace retirement plan may make your overall retirement savings effort a bit easier. Say your goal is to save 10% of your income for retirement. If the employer match is 50 cents to the dollar and you direct 6% of your income into that savings plan, your employer contributes the equivalent of 3% of your income. You are almost to that 10% goal right there.4
Think about going Roth. The younger you are, the more attractive Roth retirement accounts (Roth IRAs or Roth 401Ks) may look. The downside of a Roth account? Contributions are not tax-deductible. On the other hand, there is plenty of upside. You get tax-deferred growth of the invested assets, you may withdraw account contributions tax-free, and you get to withdraw account earnings tax-free once you are 59½ or older and have owned the account for at least five years. Having a tax-free retirement fund is hard to beat.4
To contribute to a Roth IRA in 2017, your modified adjusted gross income must be less than $133,000 (single taxpayer) or $196,000 (married and filing taxes jointly).4
Set it & forget it. Saving consistently becomes easier when you have an automated direct deposit or salary deferral arrangement set up for you. You can gradually increase the monthly amount that goes into your accounts with time, as you earn more.
Invest for growth. Much wealth has been built through long-term investment in equities. Wall Street has good years and bad years, but the good years have outnumbered the bad. Early investment in equities may assist your retirement savings effort more than any other factor, except time.
Time is of the essence. Time is your greatest ally. The earlier you begin, the more years your invested assets have to grow and compound. Start saving and investing for retirement today, and you may find yourself way ahead of your peers financially by the time you reach 40 or 50.
To learn more about Good Retirement Savings Habits Before Age 40, contact a Boulay advisor at 952-893-9320 or learnmore@BoulayGroup.com.
File Download: Good Retirement Savings Habits Before Age 40
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This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
1 - investor.gov/tools/calculators/compound-interest-calculator [7/7/16]
2 - marketwatch.com/story/millennials-can-save-more-for-retirement-by-learning-from-baby-boomers-mistakes-2016-06-30 [6/30/16]
3 - thefiscaltimes.com/2015/11/20/7-Ways-Millennials-Are-Getting-Retirement-Saving-Wrong [11/20/15]
4 - kiplinger.com/article/retirement/T001-C006-S001-retire-rich-saving-for-retirement-in-your-20s-30s.html [2/4/16]