Most people, in the midst of their working years, don’t spend
too much time thinking about retirement. It feels so far away — until
it doesn’t. That’s why it’s important to plan ahead, so when would-be
retirees are at the finish line they're not panicking at not having
saved enough. The truth is that everyone should be saving as much as
possible while they still have the earning power to do so.
For those who want to get on track now, here's a checklist that should help.
If savers have the option of investing in a 401(k) plan at work, and if the company offers an investment-matching plan, take advantage of it to the full amount. By matching contributions, the company is essentially giving away free money. Many (though not all) employers will match at least 3% of any investment in a 401(k). And if savers are lucky enough to get a raise, don’t pocket it or spend it all right away. Instead, savers should consider raising their contribution level.
If an employer doesn’t offer such a plan, savers aren't off the hook. This is when you should open up a traditional IRA or a Roth IRA. The government limits the amount that can invest in an IRA to $5,500 a year until the age of 50. At that point the amount increases to $6,500.
Deploying retirement accounts as soon as possible means taking advantage of compounding growth, or earning money by investing any dividends or interest on initial investments back into the investment itself. The beauty of compounding interest is that if when you start investing early on, you'll gain more because you'll have more time for your investments to grow. So rather than spending any profit or interest your investment may bring in, leave it put and let it grow.
When the saver hits their 30s, there will be additional accounts at their disposal. Setting up a tax-advantaged 529 savings plan
when your child is born is key. These plans, also known as qualified
tuition plans, are sponsored by states, state agencies, or educational
institutions and are authorized by Section 529 of the Internal Revenue Code.
Contributions to 529 plans are not tax deductible, but as earnings in the fund grow, they will not be subject to federal taxes and therefore will not be taxed when savers take the money out to pay for a child’s college tuition.
You should also purchase life and disability insurance, especially if you are married or have children. Even if there are two parents working, the loss of one of those incomes could have a big impact. Having an insurance plan will give you the reassurance that your family will be protected if one parent becomes unable to work or if there is a sudden death.
In terms of investing style, most financial advisors suggest that people invest more aggressively when they are younger and move to less risky investments as they age. That means investing heavily in stocks early on while there's still time to ride out the market's waves, and then start scaling back the risk as you start accessing your retirement fund. Bonds are a good alternative to equities, as are stable-value funds.
Once savers pass the age 50 mark, the IRS lets savers increase their retirement savings through a catch-up contribution. That means that an extra $6,000 before taxes, increasing the total pre-tax savings amount to $24,000.
For those who want to get on track now, here's a checklist that should help.
Deploy a 401(k) or IRA ASAP
For those just starting out, it may be tempting to avoid investing in a retirement account, thinking that there's plenty of time later for that. But these years are important ones to start saving because time is on their side, even if earnings aren't at a high level. Creating good savings habits early is key to enjoying the time value of money.If savers have the option of investing in a 401(k) plan at work, and if the company offers an investment-matching plan, take advantage of it to the full amount. By matching contributions, the company is essentially giving away free money. Many (though not all) employers will match at least 3% of any investment in a 401(k). And if savers are lucky enough to get a raise, don’t pocket it or spend it all right away. Instead, savers should consider raising their contribution level.
If an employer doesn’t offer such a plan, savers aren't off the hook. This is when you should open up a traditional IRA or a Roth IRA. The government limits the amount that can invest in an IRA to $5,500 a year until the age of 50. At that point the amount increases to $6,500.
Deploying retirement accounts as soon as possible means taking advantage of compounding growth, or earning money by investing any dividends or interest on initial investments back into the investment itself. The beauty of compounding interest is that if when you start investing early on, you'll gain more because you'll have more time for your investments to grow. So rather than spending any profit or interest your investment may bring in, leave it put and let it grow.
Set Up Various Savings Funds
Every saver should have an emergency fund that they can rely on in case they lose their job or are faced with an expensive emergency. It’s a good idea to put aside three- to six-month’s worth of your salary in an accessible savings account. This way, you won’t be forced to take money out of your retirement fund if calamity hits. Having a cushion to rely on will also give you peace of mind, and that's priceless. Keep in mind that having too much cash socked away in a low-interest savings account is counterproductive. If, at the end of the year, you have more cushion money than you need, you can put it to work in an IRA or other investment.Contributions to 529 plans are not tax deductible, but as earnings in the fund grow, they will not be subject to federal taxes and therefore will not be taxed when savers take the money out to pay for a child’s college tuition.
Wills and Insurance Investments
Everyone in their thirties should have a will. It should be updated each year or as assets or situation changes. Hopefully, no one will get a look at it for a long, long time, but it’s important to have as no one can predict the future.You should also purchase life and disability insurance, especially if you are married or have children. Even if there are two parents working, the loss of one of those incomes could have a big impact. Having an insurance plan will give you the reassurance that your family will be protected if one parent becomes unable to work or if there is a sudden death.
In terms of investing style, most financial advisors suggest that people invest more aggressively when they are younger and move to less risky investments as they age. That means investing heavily in stocks early on while there's still time to ride out the market's waves, and then start scaling back the risk as you start accessing your retirement fund. Bonds are a good alternative to equities, as are stable-value funds.
Always Keep Saving
Typically, people find that their prime earning years start in their 40s. So rather than spending more on luxuries, you should use this time period to save more. As of 2015, the IRS allows people to save up to $18,000 annually before taxes in their retirement savings account until the age of 50. Not everyone can afford to do so, but anyone who can should saving as much as possible at this time and even try to increase that savings by 1% a year. Remember the benefits of compound interest? This is where the benefits will begin to become apparent.Once savers pass the age 50 mark, the IRS lets savers increase their retirement savings through a catch-up contribution. That means that an extra $6,000 before taxes, increasing the total pre-tax savings amount to $24,000.
Don't Quit Working Too Soon
Once people reach their 60s, they may start thinking about retiring. But before taking the plunge, they should be sure they are financially ready. People are living much longer today than in previous generations, so retirement could wind up being much longer than expected. Retirees must be sure they have saved enough to comfortably and enjoyably retire. Don’t forget about the rising cost of health care, or the possibility of needing home healthcare or a care facility.The Bottom Line
It’s never too early to start thinking about saving for a secure retirement. The key is to start early and not leave things to chance. Ideally, everyone should save as much as possible while younger so that they won’t have to spend as much time and money catching up later in life.Get Out of Debt – Start Making Money
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