Last week we began our two week series on saving for long term goals by looking at saving for college expenses. You can read that post here. Today we will turn our attention to the subject of saving for retirement.
When it comes to retirement savings the conversation might be difficult for you for a number of reasons:
- You might think it’s really complicated. It’s really not.
- You might think it’s too late for you, so why bother starting now. Let me remind you that there is no time like today.
- You might think that you will take your chances with Social Security. Really?
So what I will attempt to do in this post is cover the basics of retirement savings. However, let’s get something out of the way first: it is up to you.
- It is not the government’s responsibility to take care of you after your working days. Even if it was their job, they are completely incapable of doing it right. It is your job.
- Your company will not take care of you after your working days. The days of the pension plan after 30 years of service are almost gone. They might provide you with programs to help you plan for retirement, but it is your job to take advantage of those opportunities.
When should I start saving for retirement?
- Ideally, you want to start as soon as possible once you begin working. The sooner the better.
- However, you need to make sure that: you have paid-off all of your consumer debt (everything but the mortgage) and that you have an emergency fund of 3 to 6 months of expenses.
- Note: as part of your financial plan, you should save for retirement and college expenses simultaneously.
How much should I save for retirement?
- You should be saving 15% of your household income in Roth IRAs and tax-favored retirement plans.
- Tax favored retirement plans include Individual Retirement Arrangements (IRAs), Simplified Employee Pension Plan (SEPP), 401(k), 403(b), and 457.
- How do I approach funding that 15%?
- Fund your 401(k) or other employer plan up to the match (if applicable)
- Above the matched amount, fund Roth IRAs. If there is no match at work, start with Roth IRAs.
- Complete the 15% of your income by going back to your company’s 401(k) or other company plans.
- Check out this Investment Calculator to help you with your planning.
Where should I direct the savings?
- I recommend a good mix of growth stock mutual funds with the following mix:
- 25% in Growth (Mid Cap)
- 25% in Growth & Income (Large Cap)
- 25% Aggressive Growth (Small Cap)
- 25% International
- Look for mutual funds with a good track record (5 years or longer) and returns that average at least 12%. They are out there!
- Avoid investing in single stocks. If you want to invest in your company’s stock, it should be no more than 5-10% of your retirement investment portfolio.
Here are some common mistakes to avoid:
- Never invest in something you do not understand well enough to explain it to someone else. Seek help from a good investment advisor with a heart of a teacher.
- Never take money out of these investments before age 59 1/2. You’ll be hit with high penalties and taxes.
- Never borrow from your 401(k). Any interest you might “pay yourself”, will be less than what you would have earned if you left the money alone in the good investment vehicle. Plus, if you lose your job before paying-off the loan, you will have to complete the repayment within 60 days. Otherwise the loan will be considered an early withdrawal subject to taxes and penalties.
- Never invest purely for tax savings purposes.
And finally, here are some good reminders:
- Always roll your 401(k) balance into a traditional IRA or your Roth IRA if you change jobs.
- Always build wealth slowly. Keep it simple.
- Always keep your investments diversified. Diversification reduces risk (Ecclesiastes 11:2).
One final note: Despite being the most affluent generation the world has ever seen, 54% of Americans have saved less than $25,000 for retirement. It does not have to be this way for you. You can take action today. But again, it is up to you.
“Most people have the will to win, few have the will to prepare to win.”