It is never too early to plan for retirement. The landscape of the world of retirement accounts changes as you reach retirement age. Tax benefits begin to disappear. Tax implications become more plentiful. Retirement is the practical application of A penny saved is a penny earned.
Begin your road to retirement by exercising wise economic choices:
- Buy a house you can afford
- Spend wisely on cars
- Stay out of consumer debt
- Maintain a healthy credit report.
All of these choices build big retirement muscles.
Set your retirement goals.
Calculate your current yearly expenses, including utilities, property taxes, car expenses and food budget. Do not include your mortgage interest payment, but do include your principal. Double the total to estimate how much income you will need to retire. Multiply that by the number of years you will be retired. This will be your target savings amount.
Talk to an investment counselor for help in gauging your risk tolerance, income security, dividend reinvestment and portfolio aggressiveness.
I am 20. Is it too early to start saving?
You cannot start too early. The more you do now, the less you will need to do later.
Enroll in a 401(k) plan with your employer with matching contributions or begin a retirement account. Contribute the pre-tax maximum ($15,500) to your retirement. Learn to tailor your expenses to the money you bring home. You are learning to control money better.
401(k) is not enough. If you work thirty years contributing $15,500 per year, your nest egg before dividends will be $465,000. This may sound like a lot today, but when you retire, you will only have $31,000 per year to cover all of your expenses. How much did you need again?
Discuss with a financial adviser or investing consultant whether your needs will be best served with an individual retirement account (IRA), a mutual fund account or a stock portfolio or a combination.
Do not spend tax refunds. You lived without that money all year. Instead of spending it recklessly, invest the entire refund into your retirement. You will be saving more money than your employer is investing in your 401(k).
Assess your risk tolerance. How much are you willing to gamble with your investments? Consider higher risk investments with larger dividends to grow your money faster. At this age, you will be more resilient to market losses than you will in a few decades.
I am 30. Should I change what I am doing?
You are beginning to build equity in your home. Your expenses have leveled, so your yearly raise will now be excess money each month. Instead of spending more lavishly, invest more.
Time has come to accelerate your contributions to your retirement accounts. Increase your pre-tax deductions to your 401(k) to the maximum allowable. Contribute the most allowable to your after-tax accounts.
Meet with your investment representative to discuss investing your increased contributions in diversified sectors. Your risk tolerance has reduced slightly over time. Rather than continuing to invest in higher risk ventures, put your additional money into moderate risk investments.
I am 40. Should I be worried?
Your retirement accounts should be at least two fifths of your target savings. If you are behind or foresee extra expenses like long term care, you need to take a two-pronged approach.
First, spend less. Eliminate all debt, and do not incur more. Live 100% within your means. Consider lifestyle changes such as fewer vacations, more efficient cars and lower entertainment costs. Sell extraneous possessions, like collections, art and jewelry. Trim or change hobby expenses.
Second, invest more. Upgrade your home for energy efficiency, which boosts your assets and reduces your expenses simultaneously. Invest all money you are saving from spending less. Consult with your financial adviser about reallocating your 401(k) funds for more rapid growth.
I am 50. I am home free, right?
Not so fast. You can contribute more to your savings now than ever before. Consider downsizing your home. Even if your mortgage is not entirely paid off, you can eliminate your mortgage by moving to a smaller house. Smaller houses have smaller expenses. You can double your buying power.
Invest the profit from your house sale in your retirement accounts. Take advantage of the 401(k) “catch-up” provision. You can add an additional $5,000 per year to your 401(k). Before you are 60, you can add an additional $50,000 to your nest egg, before interest and dividends.
Time to get your investments you may still have out of the high risk group. Moderate to low risk investments will help you hold on to the money you have saved. Talk to your tax adviser about tax regulations on excess contributions.
I am 60. Time to get my money!
When you turned 59 and a half, you were eligible to start withdrawing your money without a penalty. Hopefully, you did not. The biggest mistake you can make is taking out more than you need each year. The smart move is to use only dividends and interest for the first few years.
Your money needs have changed: No more mortgage, no more car note, lower home expenses. Talk to your investment counselor about scaling back your risk. You money does not need to grow as fast now.
Investigate the best way to access your money. Each year, consult your financial adviser about budgeting your withdrawals and consolidating accounts to maintain growth on the remaining investments and money.
Regardless of your age, retirement should be in your budget. It is never too early to start saving for retirement.
What are your retirement plans? Do they involve the lottery? Have you gotten on the road to retirement? If you are retired, did you plan well enough?
(c) Ann Marie Dwyer 2012
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