You shouldn’t wait until mid-career to start saving for retirement. Here are eight techniques to help your financial planning.
The news is full of articles about how few baby boomers are prepared financially for retirement. Yet many retirees have plenty of money to get through their golden years. Why are some baby boomers financially prepared for retirement while others are not?
The answer lies partly in getting started early — which is why you should thinking about saving for retirement now. When you’re in your 20s or 30s, retirement can feel like a long way away, but you’ll see in the strategies we’re about to go over that this is actually the best time to set yourself up financially. (Click here to tweet this thought.)
Here are eight techniques for financial planning that will ensure you’re comfortable when you’re ready to retire:
1. Invest systematically based upon your investment goals
Systematic investing provides discipline to save regularly rather than arbitrarily. It helps reduce the risk of timing the markets and brings down the average cost of your investments.
So how do you invest systematically? By creating a budget. A budget will allow you to manage your economic resources so you can make conscious decisions about spending. You must spend less than you earn and save the difference. You can build your own program, participate in your employer’s retirement plan — often called a 401k — or find another program run by an investment firm.
2. Harness the power of compounding
Compounding means generating investment earnings from investment earnings. This is incredibly effective over the long haul — so much so that once you understand how it works, you’re likely to join in.
Here’s an example from LearnVest: If, at age 33, you invest just $100 each month and earn 1.5 percent annual interest, that money will turn into nearly $60,000 by the time you’re 70. Powerful, right?
3. Look for an employer that supports your goals
The best companies to work for usually have great employee benefit programs. Those programs may include 401k retirement plans with matching contributions, employee stock purchase plans, and, although this is becoming more rare, defined benefit pension plans.
If you are lucky enough to have several job offers, these perks should go into your decision-making process. The right employer can help you reach your financial goals.
4. Maximize your contributions to retirement vehicles
Many great employers who provide retirement savings plans match a certain percentage of your contribution. However, they often do not match the maximum you can contribute.
Many employees only contribute up to the employer match, foregoing the maximum tax deferral allowed by Uncle Sam. If you’re self-employed, you have a number of options to save for retirement there, too, including an IRA. If at all possible, max out on these contributions, and you’ll see a huge return down the line.
5. Focus on low-cost investments
Minimizing costs should be a major part of every investment strategy. Investment expenses could include fees you pay an advisor, fees mutual funds or index funds pay their managers or other administrative fees funds are charged by their accountants, lawyers or the government.
Let’s say you invest $100,000 over 30 years, then reinvest all earnings at 6 percent. If your investment expense had an annual cost of .9 percent, you would have $439,000 at the end of 30 years. If your investment expense had an annual cost of .25 percent, you would have $574,000 at the end of 30 years. Vanguard gives another great example.
This is a sizeable difference, especially when there’s no direct correlation between the cost of a investment and the investment return.
6. Marry the right spouse
You should, of course, marry for love not money. However, most arguments in a marriage revolve around money, so it’s helpful if your savings and investment philosophies are in sync. Whether you pool your income or keep some or all of your income separate, have a plan for spending, saving and investing that you can both agree to for the long term.
And while divorce is never expected or intended, take steps to make sure it doesn’t reduce your retirement assets.
7. If you have debt, pay off your high-interest debt first
Not all debt is created equal. Pay off your high-interest rate, then follow that by attacking your lower-rate debt.
In today’s low-interest rate environment, it makes sense to pay off your debt before you continue to save. But you still want to have some savings as an emergency fund if you need it.
8. Volunteer to help those less fortunate
Helping people less fortunate than you will remind you how lucky you are to be in your financial situation, even if you have a long way to go before reaching your goals. This understanding, along with the fear of being in their shoes, will help you follow through on your financial plan. It will also help you find higher purpose in life.
Rich Grant spent over 30 years working at an international accounting firm. He now serves on boards and helps others plan for retirement at Boomerbaggage.com.