How Do You Plan for Retirement?
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It is never too early in your career to start planning for retirement, but the key is knowing how to begin. Invest in a 401(k), or Roth/traditional IRA, and use a retirement savings calculator to determine how much money you will need to retire when you want to. If hiring a financial consultant isn’t in your budget, you can still develop a strategy to save money for the future.
It pays to start saving money for retirement as soon as possible. Even in your first job.
It is also essential to keep putting money aside for retirement despite high inflation or other life occurrences.
LinkedIn News reported a study by American Advisors Group , a retirement-focused equity company, showed more than a third of Americans “feel unprepared or unsure if they are on track for retirement.” Meanwhile, a BMO Harris Bank survey revealed that 60% of younger workers are minimizing retirement contributions because of inflation.
It helps to have a retirement plan, but adjust your strategy when high inflation or other life occurrences arise. Save what you can when you can. Saving something is better than nothing.
“The more that you save and the earlier you save over time, the better opportunity you have to reach your retirement goals,” said American Retirement Association Chief Executive Officer Brian Graff .?
“If you are just starting out in the workplace, save as much as you can because you don't have any idea yet when you are thinking about retiring or what you are going to do in retirement. So, start accumulating that savings, and then you [will] have some freedom to make some choices later.”
When to Start Saving for Retirement
Consider what you want your post-retirement life to look like when determining how to plan and save for retirement.?
To start, figure out your retirement needs and calculate your annual cost of living. “Take a look at your budget, set your living expenses, know what your living expenses are going to be, and figure it out from there,” LinkedIn News reported.
Use NerdWallet’s retirement calculator to help, but you should save 15 percent of your pre-tax income for retirement each year, according to Fidelity .
A financial advisor can help you craft a retirement plan. If that isn’t in your budget yet, start the process by saving and taking advantage of your employer savings plan, like a 401(k).?
Some employers offer a 401(k) match up to a certain amount, meaning they will contribute to your retirement savings plan based on your annual contribution.
“You don't want to leave that on the table if your employer offers a match,” Graff said. “And typically, most employers have some type of financial education that goes along with your 401(k) plan. So, it's a great benefit that you want to take advantage of that doesn't require you to hire an independent financial planner.”
Some companies offer financial education about retirement savings too.
“A lot of times if you go to the human resources department and say, ‘Is there someone that can help advise me on the way I should invest’ they technically should [be able to connect you to an advisor],” said the host of The Free Retiree Show podcast, Lee Michael Murphy . “A lot of times what happens is that the HR department will start acting like they are financial planners and give you recommendations.?
“That is totally something you want to avoid. They shouldn't get involved in that.”
Human resources departments often have relationships with companies that help set up and manage 401(k) plans, Murphy said. Those companies provide employees with financial education or set up webinars to help people start investing or invest in better ways, depending on their goals.
Invest in Roth or Traditional IRAs if you don’t have a 401(k) plan
If you are a gig worker, freelancer, etc., you may not have access to a 401(k) plan. That is where putting retirement savings into Roth and traditional IRAs can help.?
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“You are getting all the earnings that you are going to accumulate and those accounts are going to be tax-free,” Graff said. “So, that really gives you a jump start on your retirement savings, because it's all your money and the government is not going to take it away.”
Also, think long-term. “You have to remember that you are not retiring in six months…and if you look at the market over the last 20, 30 years, the returns have been excellent,” Graff said.
“So, keep that perspective and invest in a solid, balanced approach. A lot of plans offer target date funds for managed accounts that might be perfect for a younger worker. And just try to remember that what happens this month or over the next few months or even this year, isn't going to matter as long as you're thinking long-term.”
Self-employed workers can also set up their own 401(k)s, like a solo 401(k) or Uni-K Murphy said.?
“They can set that up for their own side businesses,” Murphy said. “Most folks, if they want to keep it simple, can set up a Roth or a regular IRA account. But there are different options. It just depends on what you do, and where you're making your money, and what makes sense for you.”?
Murphy also suggested investing in real estate as early as possible to save for retirement.?
“It is not at the front of people's minds because they are just trying to pay for their everyday bills,” Murphy said. “But I think in a successful financial plan and strategy, having real estate is a major component of that. [My clients] that are doing very well in their financial picture are the ones that have stocks and liquid investments, and they have some real estate. So I think that it is not a matter of if, it is just how quickly you can do it.”
Adhere to a 50-30-20 Rule When Saving for Retirement
Creating a specific plan for allocating your funds helps when trying to save for retirement.
“When it comes to retirement planning, the first place you want to start is your cash flow,” Murphy said. “What does your cash flow look like? Are you at least living by the 50-30-20 budget principle? That is 50% of the income that comes in goes to essential expenses; 30% is for discretionary, which is the fun money, travel, going to the movies, eating out.?
“And then 20% is being saved, first into the savings account to build up your emergency fund, and then the rest is being invested into things like stocks, and eventually going to things like real estate. I think that is the first part of how you get on track and go towards retirement.”
As you follow the principle, you need to pay yourself first.?
“All too often we make excuses of why we don't want to pay ourselves first. Whether gas has gone up, or my family deserves this vacation, or we need to eat out once a week because it's good for our family and our lifestyle,” Murphy said.
“People will constantly say, ‘Well I just can't afford it because I don't make enough money.’ And a lot of times that is true. But most of the time people aren't willing to cut back, and they are not willing to adjust their lifestyles to save more and pay themselves first.”?
Other aspects come into play for retirement planning other than cash flow, Murphy said. It is also about developing a plan.?
“Do you have a written retirement plan?” Murphy said. “Do you have an investment portfolio that has a three-bucket approach, emergency fund, income strategy, growth strategy? Are you utilizing taxes the right way, minimizing your taxes? Do you have protection in place for your retirement with things like insurance?”
Working with a financial consultant can help you answer those questions.?
Planning for retirement may seem like a daunting task, but you can create an effective plan with the right strategy. Use a retirement calculator to determine how much you will need, take advantage of 401(k) matches, and invest in Roth/traditional IRAs if you are self-employed.?
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