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Retirement planning is something that people don’t usually like to talk about. The fact is, it is really easy to put off retirement planning when you are still trying to get your head above water from your time in school, or when you are still worried about buying your first home. Some people are very good at it, and learned quickly that the easiest way to do it is to start early and then pay less later. Unfortunately, some of us (cough) don’t seem to learn anything unless someone takes a 2 by 4 to the forehead. And as a result, it is a painful topic to consider.
Another thing I have to take out of my paycheck, you protest?! I am barely making ends meet as it is! This is where retirement planning starts to sound a lot like dieting: maybe next year I’ll start doing it. You start to find all kinds of small things that are standing in your way. Well, if the fact that the world is melting down around us hasn’t clued you in yet: now is the time to start planning for your own future. No matter how tight things are right now, you simply cannot afford to not start planning now. And to do this, you will need a plan. So roll up your sleeves and get cracking on the following easy steps to get your retirement savings underway.
- Find out about retirement plans offered through your job. Before you do anything else, try to find out if your place of employment offers a retirement plan. If you don’t already know the answer to this question, you should contact your boss or HR representative for more information. Many workplaces offer programs such as the 401(k), which are easy to participate in, and can be set up to make contributions directly from your paycheck. If your employer has this kind of plan, you should sign up for it immediately, even if you are not sure how you are going to afford to make contributions. You can set up your contribution plans for as little or as much as you want, and usually can make changes fairly easily.
- How much should I contribute? This is a tough question to address, because when you start talking in terms of percentages of income, people start getting anxious about how much their income is going to be lessened. If you are using a zero-based budget, you should be able to figure out where you can cut things in order to make contributions. How much you contribute will be affected by your current financial circumstances. Are you out of credit card debt? If so, then you should shoot for as much as 15% of your income going into retirement (this is what Dave Ramsey recommends). If you’re still paying off debt, you will obviously not contribute as much, and if you are younger than 30, you can afford to contribute less. But you should still shoot for at least 5% if it is at all workable. If you are following Dave Ramsey’s baby steps to the letter, he advocates suspending all retirement savings until you are out of debt. This is a drastic step, but if you are confident you’ll stick to Dave’s plan, it is OK to do it in the short term. Whatever you decide, though, do not let years go by without contributing to your retirement. If it’s taking you that long to get out of debt, you will need to explore different options.
- It will almost be like stealing money from the government! If you contribute 5% of your income to a 401(k) plan, your actual take-home income will only be going down about 3 1/2% Wha? you say? This is because contributions to a 401(k) are taken out of pre-tax income, so the bottom line is that you’re getting more of your paycheck and the government is getting less. For example, let’s say you make $30 an hour. In a week you make $1200. About 25% of that $1200 goes to taxes, so your weekly paycheck is more like $900. If you contribute 5% of your pre-tax income to a 401(k), then in a week you will have $60 going toward your retirement, and the number that the government taxes you on is only $1140. So, after your 25% taxes are taken out, your ending paycheck is going to be $855. Your take-home pay will only be going down $45, even though you saved $60. And hey! who doesn’t like free money?
- It seems like a big sacrifice, but really it’s not. The reduction in your paycheck seems like a big deal at first because it’s a change. When earnings fluctuate, people tend to spend less to keep up with the reduction, almost naturally. And if you’re doing a budget, you can see that in action. With a smaller number like the $45 in the example above, you can often address it by bringing your lunch to work or brewing your own coffee instead of going to Starbucks.
- Don’t forget about matching by employers. This is getting less common these days with the problems in the economy, but many employers will match your contributions up to a certain percentage. If your company does this, you can count that in your ideal of 15% of your income going to retirement. Be sure to check with your company for the details on these kinds of programs, if they exist.
- Start a Roth IRA if your company has no 401(k) (or similar) program. A Roth IRA is an independent retirement plan you can set up on your own through a financial company like Vanguard, Fidelity, or Schwab (or whatever company you prefer). Many companies allow you to set up Roth IRAs online. With a Roth IRA, you put after-tax money in, which means that you don’t get the fun of feeling like you’re stealing from the government, but the good news is that you don’t have to pay big taxes on the returns later on down the road (when your contributions have hopefully grown to a large amount). Roth IRAs have certain income limits, so you will have to check with your financial company to see if you qualify. If you do not qualify for a Roth, you will qualify for a traditional IRA, which works in much the same way but has different benefits and drawbacks.
- Invest your retirement funds according to your age and circumstances. The good news about the economy and the market these days is that stocks are on sale. So, while it is a good time to buy, you need to look for companies that stand the test of the market. The best way to do this is to buy into index funds that reflect the performance of the market as a whole. That way, if an individual company goes out of business, you aren’t left holding the bag. Of course, if you need to retire in less than 10 years, you should probably stick to things like bonds for your investments. You simply don’t have the time to wait out the market, and a financial planner can help you with these kinds of decisions. No matter what investment decisions you end up making, you should also shoot to diversify across a bunch of different kinds of funds and investments, so that your retirement eggs aren’t all in the same basket.
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