Feeling like you need to start saving and planning for retirement? Here are 6 smart tips to get you going:
Make Savings A Top Priority
Pay Yourself First
Resolve to pay yourself first. That is, direct money toward your retirement before you do anything else, like pay the bills or spend it on needs or wants. Always remember, your future should come first.
Invest Some or Most of What You Save
Potential to Grow and Outpace Inflation
Investing in equities is vital, because it gives you the potential to grow and compound your money to outpace inflation. With interest rates so low right now, ultra-conservative fixed-income investments are generating very low returns, and most savings accounts are offering minimal interest rates. Thirty or forty years from now, you will probably not be able to retire solely on your savings. If you invest your retirement money in equities, you have the opportunity to retire on the earnings and compound interest accumulated through both saving and investing.
The Effect of Compounding Can Be Profoud
The Earlier You Start The Better
The effect of compounding can be profound. Suppose you want to retire with $1 million in savings. Let’s project that your investments will yield 6.5% a year between now and the year you turn 65 and, for the sake of simplicity, we will put any potential capital gains taxes and investment fees aside. Given all that, how early would you have to begin saving and investing to reach that $1 million goal, and how much would you have to save per month to reach it?
How early would you have to begin saving and investing to reach that $1M goal?
START AT 45 = $2,039
START AT 35 = $904
START AT 25 = $438
If you start saving at 45, the answer is $2,039. If you start saving at 35, the monthly number drops to $904. How about if you start saving at 25? Only $438 a month would be needed. So, as you see the earlier you start saving and investing, the more compounding power you can harness.
Strive to Get The Match
Some Companies Contribute 50 cents for Every Dollar
Some companies reward employees with matching retirement plan contributions; they will contribute 50 cents for every dollar the worker does or, perhaps, even match the contribution dollar-for-dollar. An employer match is too good to pass up.
Invest in A Way You Are Comfortable With
Avoid Investments That are Convoluted or Mysterious
In the mid-2000s, some Wall Street money managers directed assets into investments they did not fully understand, a gamble that contributed to the last bear market. Take a lesson from that example and avoid investing in what seems utterly convoluted or mysterious.
Realize That Friends And Family May Not Know It All
Your Main Concern Should Be Staying Invested
The people closest to you may or may not be familiar with investing. If they are not, take what they tell you with a few grains of salt.
Getting a double-digit annual return is great, but the main concern is staying invested. The market goes up and down, sometimes violently, but there has never been a 20-year period in which the market has lost value. As you save for the long run, that is worth remembering.
- This material was prepared, in part, by MarketingPro, Inc.
I have been thinking more and more about retirement, so thanks for these helpful tips on starting a savings plan. I like that you suggest starting your savings account early because of compounding benefits. I am going to try to start setting aside some money each month so that I can take advantage of this.
Derek, thank you for the great feedback! Sounds like you are headed in the right direction. Below is a link to a great resource I use with my clients. On page 15 you can clearly see the benefits of starting early with your savings. Also, on page 12 there is a great checkpoint reference to use as you age. It gives you a rough idea of how much you should have in savings at each checkpoint. Best of luck to you! Here’s the link: https://www.jpmorganfunds.com/blobcontent/647/343/1272924627455_JP-GTR.pdf