Remember when saving for retirement used to be so easy? Yea, I don’t either because I wasn’t alive back then. However, if you were, all you had to do was work 40 years at your employer, get your pension and social security and then sail off into the retirement sunset.
Today, on the other hand, it's a totally different story. It now basically falls completely on your shoulders. There are so many questions. How much should I save in my 401k? What do I even invest in? What about a Roth IRA? The list can go on and on. Let's take it step-by-step to get you moving in the right direction so you can get to retirement – or what I like to call financial independence – sooner rather than later.
Since you most likely don’t have a pension through your employer—unless you’re one of the lucky few—it’s up to you to save for your retirement. With that being the case, it is imperative you start saving for your retirement immediately. I don’t care what else you have going on in your life and what great excuse you have, just start saving something.
If your employer has a retirement plan, then start with that. It’s easy and will come right out of your paycheck before you can ever get your grubby hands on it. How much you ask? As much as you can so you’re still about to pay your bills.
The minimum I would suggest would be 5% of your paycheck or whatever the max is that your employer is willing to match—if you’re lucky enough to get an employer match. If your employer gives you free money to participate in their retirement plan, then you better darn well be contributing. If you found $100 laying on the ground, would you leave it there? Of course not, you’d pick it up. However, it is amazing at how many people pass up the free money their employer is offering them to save for retirement. Don’t be one of those people.
If your employer offers a Roth 401k option, then go with that. I personally love the Roth option, and your older retired self will love the Roth option because that means all of your money in your retirement plan will be 100% tax-free.
So, what if your employer doesn’t offer a retirement plan? Well, now you’re going to have to do a little work yourself and open up a Roth IRA. You can do this about anywhere—Charles Schwab, Vanguard, Fidelity, etc.—and it’s quite a painless process.
Set it up to automatically contribute a certain amount from your checking account on a monthly basis. The max you can put into a Roth IRA is $5,500 a year, so I would encourage you get to that number quickly—$458.33 a month. If you have a spouse, have them set one up too and then they can contribute up to $5,500.
Regardless of where you start saving money, just start. Once you start, you won’t even miss it not being there anymore. The worst thing that could happen is that you get to retire early.
This is where a lot of people get held up, and I completely understand. The investment options in your 401k or Roth IRA are confusing. They make very little sense, and you’re pretty much left on your own to figure it out.
For simplicity’s sake, I would recommend just starting out with a target date fund. Just about all retirement plans offer them these days, and for the most part, they’re set it and forget it. Determine what year you think you’re going to retire and then choose the corresponding target date fund i.e. 2035, 2040, etc.
You’re welcome to get more into the weeds and do some research on the individual funds in your 401k, but I’ll leave that up to the true DIYers. At NextGen Wealth, we do offer a 401k Review Service that will make recommendations geared specifically for you.
If you do decide to the pick individual’s funds, I would highly encourage you to rebalance the account annually. Many employer retirement plans will have an automatic option for this so make sure you check the box.
Rebalancing your account ensures you’re not getting off track with your investments while also guaranteeing that you’re always buying low and selling high—which is kind of the whole point of investing.
Aside from just getting started, this is the second most important factor when it comes to saving for retirement. Make sure you increase it at least 1% every single year. You’re most likely getting some kind of a raise anyway so why not put a portion towards yourself—retirement—and take the rest home in your paycheck?
If you make $100,000 and start investing 10% a year, that comes out to $10,000. If you increase your savings 1% a year, you’ll be maxing out your 401k in no time ($18,000). And, the best part of it is you won’t even notice the extra money coming out of your paycheck because you’re increasing it in such small increments. It’s what I like to call the baby step method.
Many employer retirement plans offer automatic savings increases that you can set up, but if not, I would recommend setting an annual reminder on your calendar to increase it on the same date every single year. In fact, why don’t you go ahead and do that right now?
Even if the market gets a little crazy, don’t veer off course. The only thing that should dictate how you invest this money earmarked for retirement/financial freedom is how long you have until achieving that goal. The closer you get to achieving it, the less risk you need to take.
Also, don’t listen to your neighbor or co-worker who’s telling you to do something stupid. Trust me, they’re not helping you. Stick to your plan and if your retirement goal hasn’t changed then neither should your investments. Put your blinders on and ignore the noise.
So there you have it. Stick with these four simple steps and you’ll be on your way to the retirement you’ve always dreamed of and kissing that 9-5 goodbye. Happy saving and best of luck to achieving your financial freedom!
NextGen Wealth, LLC is a registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities product, service, or investment strategy. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor, tax professional, or attorney before implementing any strategy or recommendation discussed herein.
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