This seems to be the mantra of nearly every dieter: I’ll start tomorrow. Unfortunately, it seems to be the mantra of most investors too! Dieting and saving for retirement – both take diligence and a commitment to a long-term goal. It’s no wonder that they’re both easier to put off until tomorrow.
Real results only happen when you start today.
Saving for retirement is one of the largest financial endeavors you’ll undertake in your lifetime. Yes, it sounds huge. But, it doesn’t have to be an insurmountable task. Just like weight loss, most retirement plans are comprised of lots of small steps in the right direction. You can’t lose 50 pounds in a day (without surgical intervention), and you can’t amass millions of dollars overnight (unless you win the lottery). Stop hoping for extreme intervention, and start taking steps to plan your financial future. Here, we break down two small steps you may want to take today and additional strategies that will strengthen your plan tomorrow.
Today: Enroll in an Employer-Sponsored 401(k) and set up a Roth Individual Retirement Account (Roth IRA).
Tomorrow: Adjust your budget in order to maximize your contributions to your retirement accounts.
As noted by the Employee Benefits Research Institute, most workers name health insurance as their most important employee benefit (58%), but only 18% of workers named a 401(k) as the most important workplace reward. In reality, a retirement savings plan has the potential to take care of you much longer. When you enroll in your employer’s retirement savings plan, you have the opportunity to save up to $17,500 per year in pre-tax dollars, and many employers will make a matching contribution up to a certain percentage of your compensation. The company-paid match can be a lucrative savings bonus. To put this into numbers, assume you earn $40,000 and your employer matches your contribution up to 3% of your pay. That’s an additional $1,200 of retirement savings available to you if you contribute 3% or more of your salary into the plan.
You can also contribute up to $5,500 per year (for those age 50 and older) in an individual retirement account (a traditional IRA or Roth IRA). By establishing tax-deferred and tax-advantaged accounts, you’ll be positioned to maximize your withdrawals when you retire. If you can’t contribute the maximum to your retirement accounts now, commit to a set percentage of your income and increase it gradually each year. Over the last several years employers have also started instituting automatic enrollments in 401(k) plans. Review your plan regularly for specific details.
Today: Calculate your full retirement age.
Tomorrow: Calculate what it will take to retire.
Workers who qualify for Social Security can begin receiving benefits between ages 62 to 70. Keep in mind you won’t receive your full benefits unless you retire at full retirement age. Your full retirement age is based upon when you were born, and it has gradually increased, ranging from age 66 to 67. By visiting the Social Security Administration website, you can identify your full retirement age for a baseline estimate of when you can retire.
Let this estimated age serve as a platform for more detailed retirement planning. Now’s the time to dream about the lifestyle you want to pursue. Many experts estimate you’ll need 70-80% of your pre-retirement income to enjoy the same lifestyle throughout retirement. As of 2014, Social Security will generally provide around 40% of this amount for current retirees. It’s up to you to fill in the gaps. Now, rather than setting your sights on “saving as much as possible”… you can set specific and actionable savings goals.
Step by step, you’ll be on your way to a solid retirement savings plan.
Dr. Daniel Crosby, Ph.D., President, IncBlot Behavioral Finance
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