This is the third installment in our list of Top Ten Financial moves to make in your thirties. Each week we will discuss the next move in the list. Number one was all about getting rid of your credit card debt. Number two was about kicking the debt cycle. This article discusses getting serious about retirement saving.
We all
should have started investing while still in our twenties. Some of us have and some of us have not, but no matter what your portfolio looks like your thirties is the time to get serious about retirement. Now is a good time to make a decision about when you want to retire. You should pick a year that is not only desirable, but is also realistic. This is number will be variable and may change over time, but for planning sake you need to have a target year.
You will need to look at your finances to see how much you can realistically save each year. This is hard to do when thinking about the whole year at once, so break it down into smaller segments. Look at your monthly finances and see what you can set aside for retirement investing. This isn’t always an easy task, but most of us need to look at cutting our discretionary entertainment spending. Going out to dinner a few less times a month could mean retiring a few years earlier – sounds worth it to me! If you can find a way to save 15% of your annual income each year, you will be in a very good position. You should aim to replace 80% of your pre-retirement income when you retire.
Don’t see how you could possibly save 15% of your income? It doesn’t all have to come out of your pocket, so it isn’t as painful as you might think. Let’s say you are single and earn $50,000 a year. Let’s also say you contribute to a 401(k) plan and the company matches your contribution 50 cents on the dollar up to 6% of your salary. You would need to contribute $3,000 to your 401(k), or $250 per month, to get the largest possible matching amount, $1,500.
401(k) contributions are made in pretax dollars. So in the 25% federal tax bracket, saving $250 a month would reduce your take-home pay by just $187.50, or $2,250 per year. With your employer deducting the money off the top of your salary, you wouldn’t miss the cash, and taking that single step would get you more than halfway to your annual savings goal.
To close the gap, you could then contribute an additional $3,000 to a Roth IRA. In retirement, you’d have to pay tax on funds withdrawn from your 401(k), but withdrawals from your Roth would be tax-free.
In the end, adding 15% of your $50,000 earnings, or $7,500, to your retirement kitty would cost you only $5,250 out of pocket.
Once you have decided how much and how you will invest, you still need to stick to the plan. It is far too easy to push it off and say that you will save later. Just remember the power of compounding interest – the earlier you start the more money you will have.
As mentioned, the purpose of this article is not to provide specific advice, but to get you focused on investing for your retirement. Investing is a highly unique process for each person. Everyone has different financial situations and risk tolerances. What is important is that you start thinking about your retirement. What do you really want? What can you really expect? How much are you willing to forgo now to have more later? There is no definitive answer to these questions. You need to decide what will work for you. Just make sure you are doing something…no matter how insignificant.
Fully funding your 401k is a must and something everyone should do, but that alone is not enough. You should be looking at other retirement investment vehicles as well.
Fidelity Investments has a great tool for getting started with retirement. Try their Retirement Plan Quick Check.
