There’s been a lot of buzz lately about the financial advice you should have saved two times your salary by the time you reach 35 years old, so you can retire at 67. For some of you, this may seem like an impossible dream. Somehow, with record high housing costs and record low wage growth, you’re supposed to be saving a percentage of your pay into a retirement plan. Don’t be discouraged by your progress so far. The good news is you still have plenty of time to get on track.
These milestones above, originally published by Fidelity Investments, should serve as motivation for future saving. Keep in mind there are many factors in saving and planning for retirement going beyond this simple calculation. Here are some tips to get you started.
Don’t forgo savings to pay down low-cost debt
It’s a natural impulse to hate being in debt. If you owe a lot on your student loans or mortgage, it’s tempting to redirect your savings to loan payments instead of toward your retirement. This may not be the best use of your extra savings. Let’s say you have a 401K that makes an average rate of return of 7% per year and a student loan that charges 5%. Investing in your 401K would give you a 2% higher return on investment than paying down your debt. Over the long run, you will see that your investment will grow at a faster rate than your debt gets paid down, and your net worth will grow.
Make a budget and stick to it
I understand saving is hard. Harder still if you first need to find the discipline to track your expenses and make a budget. This is often the first step. Your budget will show you if you’re spending more than you make and exactly where overspending is taking place. It focuses your attention on how to spend smart, so you have a surplus of dollars at the end of the month. You may find you’re spending your hard-earned cash on stuff you don’t really need or even want.
Sign up for your employer retirement plan or equivalent
The best thing you can do when you start a new job is to get on your employer’s retirement plan. You can start with a small percentage of your salary and then increase it over time as you get raises. Many employer retirement plans have an employer matching contribution up to a certain percentage. Make it your goal to contribute at least as much as your employer will match. If your employer does not offer a retirement plan, you may be able to contribute to an IRA, Roth IRA, or other individual retirement plan instead.
The amount you ultimately need to save to be successful will depend on your desired lifestyle, timing, and planned expenses in retirement. Talk to your financial advisor about your goals and together you can start mapping out your successful savings strategy.
No financial advisor? The advisors at EBW always welcome the opportunity to speak with people who could benefit from our knowledge and experience. If you, or someone you know, would like to know more about how we can help, please contact us.