10 Things Everyone Should Know About Saving for Retirement
If we ever hope to stop working and enjoy golden years, we will have to save and invest until we retire. Here are ten things to know so we can increase our retirement funds (and not run out of money before we die).
10. How much should you save for retirement
There are many retirement “rules of thumb” to help people understand how much they should invest in the future. Not all of them are relevant , but research based on data from over a century suggests a “safe savings rate” for a variety of scenarios. If you have, for example, 30 years before retirement and want to replace 70% of your salary using a combination of 60% stocks and 40% bonds, you should be saving 23% of your salary every month. Go to this chart to learn about additional scenarios. If you’re just catching up, this is Fidelity’s advice on how much you should have saved by age by age group.
Don’t be frightened by these frightening numbers! Read on.
9. Even the simple thought of retirement can help you save more.
Often, our emotions and our thinking are real obstacles to getting what we want financially, but we can be tricked into saving more . For example, if you imagine yourself in retirement , you are more likely to save more, just like playing with an online retirement age calculator can help you save enough money.
8. There are many tools to easily plan and manage your retirement.
To get started and track your long term investments, we love Sharebuilder, Personal Capital, Mint, and Betterment . These 10 calculators and tools are worth bookmarking for your retirement planning. Even using investment gambling sites can help you learn how to invest. Don’t get lost in all the tools, though – check out the basics first (see below).
7. Choose the correct type of retirement account.
401 (k) of some employers may not be optimal for your investment, or your employer may not even offer one , so your choices in these scenarios will really depend on your options.
There are also all kinds of retirement funds – Roth’s IRA, traditional IRAs, 401 (k) s and others. Check out our beginner’s guide to the differences between types of IRAs , starting a 401 (k) account, and what types of investments to use for taxable or deferred taxes if you don’t want your money to be eaten up by taxes.
6. Compounding is so powerful it’s almost magical
The power of compounding turns a dollar saved at age 20 into ten dollars saved at age 50, without any additional investment. When you are young, time is your best financial asset. Not convinced yet? Rule 72 explains how your money can double in a short amount of time and how even the smallest investment now – like 1% more than your pension – can make a huge difference. Compound interest matters more than you think .
5. Don’t miss an employer match
Take it. Take it. Matching your employer with your retirement contributions is one of the best benefits you could get as an employee – literally free money and essentially a guaranteed 100% (or 50%, or whatever) return on your investment.
4. Pay attention to fees first.
When choosing investments for a retirement account , the most important metric to look at may be the expense ratio – the percentage the fund charges just for managing your money. This fund analysis tool can help you compare 401 (k) fees, while this one reveals hidden fees that can cost you a lot in the long run. After taxes, fees, and inflation, you may not earn as much as you think, but you will earn more if you keep your fees to a minimum. (Actively managed funds tend to perform significantly worse than funds that simply monitor the stock market.)
3. Automate your savings – and stick to the plan
Even if the stock market gets rough, don’t panic. Think of it like a roller coaster (and it is) and don’t go all the way down . (However, review your portfolio at least once a year to balance the amount of risk you take based on your retirement date.) The most painless way to do this is to automatically send a portion of each paycheck to an address. your retirement fund. This dollar value averaging strategy can help you balance the times when stocks are more expensive and when they are cheapest. (Don’t try to time the market.)
2. Getting started is easier than you think
Investing can definitely be daunting, but if you keep it simple you can create (mostly) a set and forget about the investment portfolio . Investing in individual stocks can be attractive to advanced investors, but in general most people will benefit from a simple lazy hands-off strategy . You can even start small – as little as $ 50 a month .
1. The best time to start investing is now
Perhaps most importantly, the sooner you start saving for the future, the better. Hundreds of thousands of dollars better . According to Warren Buffett , waiting to start saving is one of the biggest money mistakes we can make, and even a bad investment is better than no saving at all . In the famous words of Nike: “Just do it.”
Photos by Tina Milehot-Roberge, Natalia Kalyatina (Shutterstock), James Robinson , HE DEAD , MoneyNing , Andreas Poike , Digerati Life , Sergey Galushko (Shutterstock).