The idea of retirement can be polarizing at times. For some, retirement is something to look forward to as they believe it will be a great opportunity to relax, spend money, and do the things they always wanted to do but couldn’t because of work. For others, retirement is scary and they worry about their ability to financially support themselves, or their family, without the income they have grown accustomed to. Additionally, there is a third group of people — which tend to be on the younger side — that neglect the idea of retirement because to them it seems too long away to worry about. However, it is those individuals that might be in the most trouble when the time for retirement does come. For example, unless they are among the few to have become significantly independently wealthy, saving money near the beginning of their career to make sure that they have enough for a pleasant life after their career is mandatory. That said, making the transition from saving nothing to consistently putting money away can be difficult. Further, this is particularly true in the early stages of saving (and investing) as many people do not know where to start. To help with this, here are a few tips for getting your savings off to a good start and beginning to plan for retirement:
Do Not View Saving as Optional:
One of the first steps an individual can take when preparing for retirement is to overcome some of the mental barriers associated with saving money. Namely, the notion that saving money from each paycheck is an option. If people truly want to take saving seriously, they might want to consider coming up with a detailed saving plan and sticking to it. For those struggling with the self-control to do this, keep in mind that no one knows what Social Security will be like a decade (or further) from now, and the same can be said regarding job benefits ability to cover the increasing cost of living in the United States. Therefore, planning is a great way to mitigate risk. Similarly, it is important to remember that many businesses (as well as the government) offer saving incentives such as an IRA or 401(k). Benefits of saving through these offering include a lower year-end tax bill and the ability to save tax-free for years to come. Finally, many companies are willing to give additional funds when you make a contribution to a retirement savings account. In these cases, an individual is essentially receiving “free money” from their employer just for saving some of the money they have already earned — surely something to consider maximizing when possible.
Realistic Risk Taking:
Another aspect of saving for retirement that individuals might want to consider when getting started is investment risk. Although they might not be professional investors, the idea of risk is relatively easy to understand — what are the odds that the individual is going to lose a substantial portion of their money? Keep in mind, the term “substantial” is subjective in this context as different individuals will have different answers as to how much money that it. With this in mind, one might want to consider finding a realistic balance for their own risk. For instance, if an individual is starting with small amounts of money being saved, it might not make sense to invest in fixed income or other particularly conservative outlets. Meanwhile, choosing too risky of investments from the start can be a bad option too as they could crush savings if they fail. For these reasons, many people start with more moderate (basic) investments such as index funds or ETFs (Exchange Traded Funds). As always, this is not a guarantee of success or even a recommendation as to what you should do, because ultimately, your financial decisions should be up to you. However, it is a popular strategy at the moment.
Saving / Investing on a Percentage Basis:
Hopefully with time the habit of saving will become second nature for those that are serious about financial security and freedom. Moreover, with time, many individuals find that their earnings increase and enable them to save more. As result, one might want to consider choosing the amount they put away based on a percentage of their earnings rather than a flat amount. For example, if an individual earns $4,000 per month early in their career it could make sense to save 20% of it — totaling $800. However, if that same individual doubles their income later in their career and makes $8,000 per month, saving $800 would only be equivalent to saving 10% rather than $1,600 — had they stuck to their original system. In this scenario, it can be seen that sticking to a percentage based system might enable someone to save more over time without sacrificing their growing buying power (increasing income).
In the end, the only way to start saving for retirement is to buckle down and do it. Ultimately, there is no universally correct way to save money or invest, but neglecting it all together could result in some serious consequences. As always, the best course of action is to do your own due diligence and discover what system of saving/investing is best for you!