Gone are the days when most Americans could count on their employer to fund and provide a guaranteed retirement plan. Starting in the 1970s, employers began shifting responsibility for retirement planning onto individuals, leading to an increase of plans such as IRAs and 401(k)s becoming popular ways to save.
With Social Security’s uncertain future also looming large, it has become clear that if you want financial security upon retiring, relying solely on your employer or government is no longer enough—you must take matters into your own hands to get the senior benefits you deserve. This notion may sound daunting but taking steps now can make a big difference later down the line; according to research by Employee Benefits Research Institute (EBRI), six out of ten people feel confident about having enough money for comfortable living in retirement yet half have less than $50K saved up already!
Here are some steps you can take now to help make sure your finances don’t come up short when you’re ready to retire:
Start saving early
Experts agree that this is the single most important success factor when it comes to saving for retirement. Doing so enables you to benefit from compounding returns, a powerful tool that enables even small amounts of money to grow substantially over time.
The longer your investment time horizon, the more potential your savings and investments have to grow.
But if you get a late start saving for retirement, don’t despair. Play catch up by stashing away more retirement savings.
Establish an IRA or SEP-IRA
First established in 1975, IRAs remain a great retirement savings vehicle for many Americans. There are several different types:
- Traditional IRAs
- Roth IRAs
Traditional IRAs may provide an immediate tax deduction, depending on your adjusted gross income and whether or not you participate in an employer-sponsored retirement plan. Roth IRA contributions are not tax deductible, but those who qualify for a Roth may be able to withdraw the money tax-free after they reach age 59½.
Both types of IRAs enable you to benefit from tax-deferred growth over the long term.
Small-business owners and the self-employed should determine whether a Simplified Employee Pension (SEP) IRA might be the right savings vehicle.
Contribute to a 401(k) plan
You can contribute to an employer-sponsored 401(k) in addition to making IRA contributions, thus shifting your retirement savings into overdrive.
This especially makes sense if your employer matches your contributions—by kicking in 50 cents for each dollar you contribute, for example.
For self-employed individuals, there’s the Solo 401(k), which is similar to an employer-sponsored 401(k).
Set up an automatic investing program
You don’t miss money you never see. This is the idea behind automatic investing.
Here’s how it works: Each month, you arrange to have a specific amount of money automatically transferred from your checking or savings account directly into your retirement plan.
This may enable you to take advantage of a strategy known as dollar-cost averaging, which can reduce the risk of buying into the stock market at or near a peak. Instead, your investments are spread out evenly over time.
Make sure you’re diversified
Diversification refers to how your money is spread out among the three broad categories of investments: stocks, bonds and cash equivalents (like money market accounts and certificates of deposit).
No single type of investment performs well all the time, which is why a diversified portfolio is better able to ride out the inevitable ups and downs in the market.
Stocks and bonds, for example, usually have an inverse relationship: When the value of one is falling, the other is often rising, and vice versa. Meanwhile, cash equivalents are the safest of all three asset types, providing a level of stability for your portfolio regardless of market conditions.
Keep a long-term focus
It’s easy to get emotional watching the day-to-day market gyrations and reading the newspaper headlines. However, it’s critical to remember that retirement saving and investing is a long-term goal, and therefore you must keep a long-term perspective on the markets and your savings.
Most retirement savers and investors will benefit from what’s known as a buy-and-hold strategy. This means you build a diversified portfolio by purchasing quality investments on a regular basis over time. You then re-examine your portfolio periodically (such as once a year) and make slight adjustments as necessary to ensure that it’s still on track to meet your long-term objectives.
Estimate how much money you’ll need
Granted, it can be hard to anticipate how much money you may need to live on during retirement, especially if it’s 20 to 30 years away. One common rule of thumb is to plan on needing 70 percent to 80 percent of your pre-retirement income to meet your basic living expenses during retirement.
In making this determination, don’t forget to factor in the effects of inflation. The ongoing rise in the cost of basic goods and services erodes the purchasing power of your money over time. For example, $100,000 in 1989 dollars is worth only about $54,000 today, and the same hundred grand in 1979 dollars is worth less than a third (just $29,000) today.
Still, having a rough idea of how much you need in your nest egg will help you plan saving and investing strategies. And you’ll be able to gauge how well you’re doing at key milestones along the way.
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