4 Easy Steps to Jump Start Your Retirement
It’s never too early to start planning for your retirement. I have friends who are 8 years into their professional careers and have not put more than a few thousand dollars towards their retirement. They live pay check to pay check despite making over $70,000 each year with none (or very little) of that money going towards retirement. They have taken every raise and used it to fund lifestyle creep. Most of our friends in these situations also choose to rent.
What are they going to do in 30 years when they’re trying to afford their house (or rent still) and meals while working less (if at all) and the cost of living is higher? Here’s something that I hear regularly:
‘If you fail to plan, you are planning to fail.’
That is absolutely the case when talking about your retirement. My coworkers are obviously government employees, so they see their job as a sure thing that they can count on. It’s easy to not care about the future when you’re 25 and see constant paychecks with consistent amounts on them.
I had a boss who waited until he had been working for over 12 years before he realized that he was quickly approaching retirement with very little saved up. His solution is that for the last few years he’s been putting almost half of his pay check into tax shelters like his IRA and federal Thrift Savings Plan (similar to a 401k). Another friend who works with me now is putting over 60% of her pay into retirement savings because she hasn’t contributed anything up until this point (lucky for her she found a boyfriend willing to foot many of their shared bills).
So if you have found yourself in a similar predicament, or maybe you’re just starting your career and realize the benefits of saving early, here are a few steps to get you going in the right direction.
- Talk to a Professional. If you have one available to you (preferably at no cost and who doesn’t work for commissions), talk to a financial advisor. Many banks and brokerage firms have them available to you at no cost.They may try to sell you on their products (mutual funds and retirement/savings accounts) and that’s okay. Just hear what they have to say and consider shopping around as well.
- Set up a checking and savings account. This can be easily done through a bank. I’d recommend one that has a powerful internet presence and ideally a smart phone app. I’m able to deposit checks on my phone with mine. Personally, I recommend 2-3 months’ worth of your income be saved in a savings account just in case. (Dan would recommend more, but you must judge the stability of your job and your housing situation for yourself.) Your goal should be to minimize the amount of money that sits in your checking account at the end of each month. That may mean sticking to a strict budget like Dan or it may mean you simply take whatever you afford to save at the end of each month and put it in an investment account. Which brings us to step 3…
- Set up your investment accounts. The first thing I would recommend doing is setting up a Roth IRA. This is easily maxed out each year. If you can afford to invest more knowing you won’t be able to touch it for a long time, set up a traditional IRA as well. If you want to invest, but you may need the money in the future (down payments on mortgages or car loans), put your money into a mutual fund. This is easy to do through your broker (or possibly your bank like USAA).
Pick a fund that suits your needs. Generally you can afford to be more aggressive and accept more risk when you’re younger compared to when you’re about to retire. Dan and I both recommend funds that follow the market averages until you become more familiar with different sectors and investing/trading.
- Set up automatic deposits. Your goal is to automate as much as you can. When you know exactly how much and on what date money is leaving your account, you can plan so much better. If you’re like me, you’re probably going to forget all about your money when life starts getting busy.
Do a little research to figure out how much you should be investing. I recommend 20% at least. Personally, I’m in the 20-30% range depending on the month and what my expenses are. I use automatic deposits to move money from my checking account to my Roth IRA and my USAA mutual funds. I also use automatic deposits to move money directly from my paycheck to my Thrift Savings Plan without it ever entering my checking account.
You can use the same method to pay your bills at the same time each month. Obviously this will help you avoid shitty late fees and negative affects to your credit. And, for as much as we love automatic deposits, we take whatever is leftover that month, and manually deposit that into long-term investment vehicles.
The moral of this lesson is that setting up your retirement may take you a few hours, but at the end you’re going to be set up for success. Does this list seem pretty short? It does to me, but really, it’s this simple. People don’t do it because they’re intimidated, bogged down with frivolous expenses, or just plain lazy. Call your bank or your broker if you have any problems. They should be more than willing to help and you usually can’t tell they’re judging your ignorance by their tone of voice.
Do you have any advice or suggestions? Leave them in the comments below!