Good Retirement Savings: Start Now

Some early financial behaviors that may promote a comfortable future | July 12, 2016


You know you should start saving for retirement. What can you start doing today to make that effort more productive? To improve your chances of ending up with more retirement money, rather than less?

Structure your budget with the future in mind. Live within your means and assign a portion of what you earn to retirement savings. How much? Well, any percentage is better than nothing – but, ideally, pour 10% or more of what you earn into your retirement fund. If that seems excessive, consider this: You may live 25-30% of your lifetime with no paycheck except for Social Security. (That is, assuming Social Security is still around when you retire.)

Saving and investing 10-15% of your paycheck for retirement can really make an impact over time. For example, say you set aside $4,000 for retirement at age 30 in an investment account that earns a consistent (hypothetical) 6% a year. Even if you never made a contribution to that retirement account again, that $4,000 would grow to $30,744 by the time you turn 65. By comparison, if you made monthly contributions of $400 instead, that retirement fund mushrooms to $565,631 by age 65.1

Avoid cashing out workplace retirement plan accounts. Learn from the retirement saving mistake too many baby boomers and Gen Xers have made. It may be tempting to just take the cash when you leave a job, especially when the account balance is small. Resist the temptation. One recent study, conducted by behavioral finance analytics firm Boston Research Technologies, found that 53% of baby boomers who had drained a workplace retirement plan account regretted their decision. So did 46% of the Gen Xers who had cashed out.2

Instead, arrange a rollover of that money to an IRA, or to your new employer’s retirement plan if that employer allows. That way the money can stay invested and retain the opportunity for growth. If the money loses that opportunity, you will pay an opportunity cost when it comes to retirement savings. As an example, say you cash out a $5,000 balance in a retirement plan when you are 25. Had that $5,000 stayed invested with a 5% interest annual rate, it would become $35,200 some 40 years later. So today’s $5,000 retirement account drawdown could amount to robbing yourself of $35,000 (or more) for retirement.3 And, you would be responsible for taxes on the withdrawal, so you might net only $4,000 or less.

Save enough to get a match. Some employers will match your retirement contributions to a degree. You may have to work at least 2-3 years for an employer for this to apply, but the match may be offered to you sooner than that. The match is often 50 cents for every dollar the employee puts into the account, up to 6% of his or her salary; this is like giving yourself a raise. With the exception of an inheritance, an employer match is the closest thing to free money you will ever see as you save for the future. That is why you should strive to save at a level to take advantage of the full benefit, if at all possible.4

Saving enough to get the match in your workplace retirement plan may make your overall retirement savings effort a bit easier. Say your goal is to save 10% of your income for retirement. If the employer match is 50 cents to the dollar and you direct 6% of your income into that savings plan, your employer contributes the equivalent of 3% of your income. You are almost to that 10% goal right there.4

Think about going Roth. The younger you are, the more attractive Roth retirement accounts, such as Roth IRAs, may look. The downside of a Roth account? Contributions are not tax-deductible. On the other hand, you may withdraw account contributions tax-free; and once you are 59½ or older and have owned the account for at least five years, you get to withdraw account earnings tax-free.4

To have a Roth IRA in 2016, your modified adjusted gross income must be less than $132,000 (single taxpayer) or $194,000 (married and filing taxes jointly).4

Set it and forget it. Saving consistently becomes easier when you have an automated direct deposit or salary deferral arrangement set up for you. You can gradually increase the monthly amount that goes into your accounts with time, as you earn more.

Invest for growth. Much wealth has been built through long-term investment in equities. Wall Street has good years and bad years, but the good years have outnumbered the bad. Early investment in equities may assist your retirement savings effort more than any other factor, except time. Work with your financial advisor to determine your risk tolerance.

Time is of the essence. Start saving and investing for retirement today, and you may find yourself ahead of your peers financially by the time you reach 40 or 50.

Citations.

1 – investor.gov/tools/calculators/compound-interest-calculator [7/7/16]

2 – marketwatch.com/story/millennials-can-save-more-for-retirement-by-learning-from-baby-boomers-mistakes-2016-06-30 [6/30/16]

3 – thefiscaltimes.com/2015/11/20/7-Ways-Millennials-Are-Getting-Retirement-Saving-Wrong [11/20/15]

4 – kiplinger.com/article/retirement/T001-C006-S001-retire-rich-saving-for-retirement-in-your-20s-30s.html [2/4/16]

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.