Keep in mind when a saving plan is started early, retirement planning is almost always successful. But, the converse is not true most of the time. People even when started late, piled up adequate retirement saving portfolio. A prime example could be us, we started saving for retirement when I was in my thirties but since we could save 50% of our income, we are progressing well. Enjoy this guest post from Rick!
The whole essence of successful retirement planning is to start as early as possible, but unfortunately by the time many people realize its importance, it is generally too late.
The average life expectancy of people is increasing globally since the last 200 years. This is obviously a point that all of us should be happy and proud about, but there is an additional responsibility that we need to be equally aware of. A higher life expectancy also means that people will add as many years to their retirement life.
So the young earning members of the society would have to save more than their parents today in order to bear the cost associated with a longer retirement phase.
When we are young and have just begun earning, we hardly realize the need to save and invest for the future. An advice to save by the elderly generally goes unheard. The earlier you start, the more time you give your investments to grow and translate into meaningful savings when you retire.
Assuming an 8 percent compounded rate or return on your investments, a dollar that you invest when you are just 20, would fetch you twice the amount when you retire (at the age of 60) (The calculation) than what you receive if you invest the same 10 years later at the age of 30. The power of time works wonders.
Your money continues to earn compounded returns and you can look forward to a comfortable retirement, where financial woes do not bother you.
Understand your Retirement Needs to Know How Much you Need to Save Today
Unless you have a realization of the quantum of retirement money that you need to accumulate over time, you would never be able to appreciate the need to save. There are online tools that will help you calculate how much you need to save today so that you and your spouse can look forward to a happy and comfortable retirement life.
Invest in an Employer Sponsored Retirement Plan
If your employer offers a 401(k) retirement plan, you should start investing in it. The four advantages of 401(k) plan are –
- You can defer taxes on the savings you invest
- You get free money from the employer in form of matching contributions
- Your savings will be invested in appropriate investment avenues and will start delivering return
- 4) You do not have to remember or force yourself to save every year.
Even if you find the savings miniscule, please do not bother and go ahead and make sure you contribute.
If there is no employer sponsored fund, you can invest in a Roth IRA instead. Contribution made in a Roth IRA is post tax and hence the retirement funds that you would get will be tax free. When you are young, you are usually in a lower tax bracket and hence it makes lot of sense to go for a Roth IRA.
(Related – Retirement saving for low wage earner)
Be Aggressive in your Investments
A young investor should avoid investment in bonds or other similar assets whose returns are restricted. The best part of starting early is that you can be aggressive in your investment strategy as you get a longer investment horizon, which you can take advantage of and invest in asset classes like equity and real estate.
You can choose to invest almost 100 percent of your savings in asset classes like equities and expect to earn the traditional return that equity market promises in the long term. Equities are risky only when the horizon is not long enough, as in the short term you are affected by the economy cycles.
When you start young you have 20 to 30 years on your side and hence your equity investments are immune from these economic cycles. As you approach closer to retirement, you can start shifting your equity investments into debt.
(Related – 10 Retirement plan mistakes to avoid)
If you do not have enough time or knowledge to invest in equities, you can entrust the job to a mutual fund, which will efficiently manage the money for you. You can invest in a mutual fund, which has an investment strategy matching your age group.
Inculcate Financial Discipline with Consistency
Maintaining financial discipline is all about ensuring that all your expenses are adequately covered by your salary after allowing for the planned savings. You also need to avoid getting into debt especially the credit card debts, as these can kill your ability to save. Your budget has to prioritize savings over expenses.
What I mean is if you are not able to reach your targeted savings, you need to look for ways to cut your expenses. The more important element here is consistency in maintaining this financial discipline, so that you continue to prioritize the need to save over the urge to spend.
Remember investing is still easy as the more difficult part is to make the savings. To ensure that you remain motivated in this long process, set yourself intermediate targets and ensure that you achieve those.
Avoid the Tendency to Splurge
While you are young you have more desires and wishes to be fulfilled, but it is important that you fix a budget that has a provision for savings. In order to ensure that you do not fall to the temptation of spending the idle cash in your savings account, opt for recurring deposits with standing instructions to credit your account for a fixed amount as soon as the salary is deposited.
(Related – 20 Best practices for retirement saving)
Plan some small savings that will go a long way in helping you save for the future. Make a point that you do not spend on things like new clothes or drinks or parties, unless you have saved a fixed amount from your salary every month.
Small sacrifices on entertainment when you are young will help you lead a comfortable and financially stress-free life after retirement. Also, remember that savings are easier to make when you are still in your 20s and you are still not burdened with family responsibilities.
So make the most of this time to build a comfortable investment portfolio.
About the Author: Rick is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He regularly blogs at Biggerpocket, SocialMediaToday, NewWireInvetor & his own blog Self Directed Retirement Plans where he focuses on retirement planning, investment, securing future related topics.