According to a recent study by GoBankingRates, Over 40 percent of Americans have less than $10,000 saved for retirement. Considering that the average American’s retirement now lasts roughly 20 years, those who never learned how to plan for retirement are likely to find themselves in dire straits once they enter their golden years. “With a steady, significant share of the working population saving nothing or relatively little, it’s virtually guaranteed that they’ll be unable to afford a modest emergency expense or finance retirement,” says Mark Hamrick, senior economic analyst for Bankrate.
Here’s the good news: you’re never too old —or too young—to start putting together your plan for retirement. Here are the three steps you need to take to get started.
1 - If You’re Not Saving, Start!
Many Americans avoid saving for retirement simply because they believe they don’t make enough money to justify it. It’s easy to understand this mindset. Managing everyday expenses and debts is difficult enough, so adding savings to the mix can seem like a low priority. But regardless of your financial situation, it’s essential to have a nest egg that you contribute to regularly if you plan on retiring one day.
Financial planners advise socking away at least 10% of your income for retirement, but in truth, every little bit helps. Look at your budget and compare you and your family’s “wants” vs. “needs.” (If you don’t have a budget, now is a great time to start one). If you can trim back a few items from your “wants” list and add that money to a retirement fund instead, that’s a great first step. If it helps, think about it as as paying yourself first—your future self, that is.
If you have no idea how much you’ll need to save for retirement, a retirement savings calculator can help you figure out approximately how much you’ll need based on your age, income, and financial goals.
2 - Open a (Free) Retirement Account
A retirement account is truly the best way to save for your retirement. There are two main types of retirement accounts: 401(k)s (or 403(b) or 457(b) if you work for a nonprofit or government entity) and IRAs. Which type is best for you depends entirely on your particular financial situation.
If your employer offers a 401(k), it’s a no brainer. You’ll want to start contributing to it ASAP, even if you’re just starting out in your career. Why? Two words: compound interest. “Compound interest occurs when the interest earned on your investment is re-invested and earns interest,” says Taylor Close, a certified IRA services professional writing for the Pensco Trust Company Blog. “By earning interest on interest, your retirement savings account has the potential to snowball over time, and you may not need to put aside as much money to reach your retirement goals.”
If your employer offers employee-matching, even better—the contribution from your employer is essentially free money. Most experts recommend contributing to your 401(k) up to the employer’s matching amount. For example, if your employer matches just 3% of your contribution, all you need to do is contribute 3% of your income each month to effectively double your investment without paying taxes up front.
If you employer offers a 401(k) without employee matching (which is increasingly rare), it’s likely still a good idea to contribute. Just make sure the plan offers a decent array of investment options and doesn’t charge unnecessary fees, which can erode your savings. It’s also perfectly ok to start small. Try contributing just 1% of your income the first month, and then raising that number by one percentage point each month over the course of a year. When you contribute in small increments over time you’re less likely to feel it in your pocketbook.
If an employer-sponsored 401(k) isn’t available to you, you still have options. You can get a lot of the same benefits with a traditional or Roth IRA account. The main difference between the two is how your money is taxed. With a traditional IRA, your contributions are tax deductible, which means you’ll save money now but will be taxed in retirement at your usual tax rate. With a Roth IRA, it’s the opposite. Your contributions are funded with after-tax money, meaning your withdrawals during your retirement will be tax free.
The type of IRA that’s best for you will depend on a number of factors, including your income, your spouse’s retirement plan if you’re married, and what your tax rate is likely to be when you retire. Roth IRAs typically offer greater flexibility like more lenient early withdrawal terms and fewer restrictions for retirees, but again it depends on your eligibility and where you are in the lifecycle of your career. You may also be able to convert a traditional IRA to a Roth IRA via the so-called “backdoor method.” However, you’ll want to make sure you’re not incurring unnecessary penalties or fees when the conversion takes effect.
Regardless of the type of retirement account(s) you choose, you’ll want to make sure you diversify your overall financial investments with a combination of mutual funds, stocks, and bonds. Don’t worry, you don’t need to understand the stock market to invest wisely. Talk to your employer’s benefits team, consult an expert at the company that offers the plan, or speak with a retirement planner to get expert advice on diversification.
3 - Make Friends with Technology
One huge advantage of our tech-obsessed culture is that there are all sorts of ways to take the legwork out of managing your finances. First and foremost, make sure to automate your retirement fund contributions. Most plans allow you to automatically transfer a percentage of your paycheck to your retirement account each month, so all you have to do is “set it and forget it” to start building your savings.
Online Tools, Apps & Resources
From online software, to robo-advisors, to micro-investing apps, there are countless resources available to help today’s investor, and many of them are free. Again, the tools that are best for you depend on your unique financial habits, income, and retirement goals. For example, if you’re trying to put away more for your retirement but you struggle with saving money, Mint, Acorn, and You Need a Budget (YNAB) are all great budgeting resources. If, however, you’ve got your retirement accounts all set up but want to keep tabs on your investments, Personal Capital is a free investment management service with capabilities like a 401(k) fee analyzer and other tools to help you optimize your investment strategy.
The Bottom Line
The days of relying on pensions and Social Security payouts to support you during your retirement years are gone, so the best way to ensure a comfortable retirement is to take matters into your own hands. Whether you’re 25 or 65, the time to start is right now. Your future depends on it.