This article was last updated on July 22
It’s time to save for retirement. It doesn’t matter how old or young you are, it doesn’t matter if you’re single or married and it doesn’t matter how good or bad the economy happens to be at this particular point in time. Some things are simple and others are complicated. This is simple. If you’re not putting money towards your retirement now because you have a certain lifestyle you want to live, you’re not going to live that lifestyle when you’re older and little hope of getting it after you retire. How’s that for tough words of advice?
Now that we have the tough love out of the way, let’s be fair. Maybe the reason most people don’t save enough for retirement is because they don’t know how. We’re going to help you with that. Here are a few quick pointers to help.
Always Keep This Important Rule in Mind!
No matter what we say in this article, regardless of what you read or what a financial advisor later tells you, you cannot ever rely on one income source for your financial savings. That company sponsored pension plan will be gone if the company ceases to exist and the IRA you have could fall victim to unforeseen financial events that are out of your control. All of the ideas below should be used together, not exclusively.
Set a Goal…and surpass it!
Every article tells you to set a goal but few tell you that your goal is most likely wrong. Specifically, it’s probably too low to sustain your dreams of a retirement that you can call “the Golden Years”. Experts say that you’re going to need 90% of your inflation adjusted pre-retirement income in order to live your current lifestyle.
There are two reasons that people will aim too low based on that 90% rule: First, it’s not 90% of today’s income. It’s 90% of the income you were making the day before you retired. If you have another 25 years left before you retire, you’re going to need a lot more money than you are making now to live your current lifestyle.
Second, you don’t know what’s going to happen with the financial landscape in your corner of the world over the life of your working years. What if you want to move to a beachfront property that is considerably more expensive than your current home and what if you decide that just a couple of years before you retire? Have enough money ready in order to give yourself options later.
Contribute to your Employer’s Plan
Nothing new here. Seems obvious to the financially savvy consumer but there are a few holdouts and the reason for that is because their financial situation doesn’t allow them to have any other deductions from their check. Employers often match contributions doubling the power of that deduction so you MUST contribute to those plans. Find something in your personal finances that you can cut out to fund it. It truly is that important.
Stay Away from the Savings Account…at Least for Now
Savings accounts are easy to understand. Give your money to the bank, don’t touch it, and the bank pays you money. That beats the complexities of all of these different retirement accounts that require an economics degree to understand. Why not just keep the money in the bank?
The first problem with this theory is that you lose money in a savings account. They don’t pay enough interest to offset the normal rate of inflation. If you calculate the interest you would earn, you will find that you couldn’t come close to funding your retirement like this.
The other problem is that Americans as a whole are not the most disciplined of people. If you can get to the money, you will probably find a reason to use it for other reasons.
Later in your career, a savings account, certificate of deposit, or other bank sponsored investment may be an appropriate investment choice.
Understand Your Investments
Ahh, yes…another one of those general tips that appear in most articles. They forget to tell you how to do that, though. The truth is that the mutual funds that you own aren’t easy to understand. You aren’t going have time to learn the complexities of these investment vehicles without a lot of work. It’s not practical to expect that.
Here’s what you can do, though. Learn how to monitor the rate of return, read about the funds and know their make-up. Learn how to read a basic chart. If the trend line is going up, that’s good. If the trend line is going down, that’s bad and you need to find out why. Finally, learn about the S&P 500. If your account isn’t appreciating at the same rate or more than the S&P 500, you should ask why.
In short, learn enough to know the questions you should ask.
Start an IRA
This is an account that you can start on your own that has certain rules attached to it that make it specific for retirement. This gives you complete control of how your money is invested. This account along with an employee sponsored retirement account and possibly a small amount of additional income from social security will allow for diversification.
This is just a start. Watch for other articles dealing with your retirement in the near future but for now, understand this: it will take some time but you have to have a better than average amount of knowledge about your retirement funding. It’s your money and your future and nobody care about it more than you. Don’t simply trust your financial advisor to map out your financial future.
Remember all of that research you did when you made your last big purchase? Do twice that amount for your retirement and you will be well on your way to the security you and your family need in the future.