Once upon a time, retiring once sounded so easy—see a later tension, hello pension! But pension plans are history—only about 25-30 percent of working Americans have one. And if you’re counting on Social Security to get you through a comfortable retirement, go online and Google “Social Security” for a hard dose of reality. So how can you make sure you’ll have enough money for what will probably be a long, and hopefully wonderful, retirement? It takes careful planning and honest saving—starting today—no matter what your age may be.
Don’t even think about retirement until you ask…
How long will I be retired for? The easy answer for many is “for the rest of my life.” But think in terms of years as people are living longer these days. You could spend 25 to 30 years in retirement. You want to make sure that your money lasts at least as long as you do or you future could present some problems.
How much do I need?
You’ll need more than you probably imagine to live comfortably—experts say at least 80 percent of your pre-retirement income. Even though school tuition—and maybe even your mortgage—will no longer be a burden, you can count on high medical costs eating up a big chunk of your savings and retirement income.
What will replace my paycheck?
Social Security won’t be enough. For average full-time workers who retire today at age 65, Social Security replaces about 40 percent of earnings. You’ll need to make up the rest with personal savings, retirement accounts, and investment income. So the first step in meeting your retirement needs is estimating how much you’ll need to invest.
And you haven’t signed up for your retirement plan because…
You’ve seen why you need to invest on your own—starting today. What’s the best way? Step No. 1 according to many financial professionals is joining your employer’s retirement plan. You not only save, you also get tax advantages.
How do I contribute?
It’s easy. You simply “defer” a percentage of your current pay directly into the plan. The amount you contribute is automatically deducted from your paycheck before taxes are calculated.
What’s the real benefit of pre-tax contributions?
Because contributions are subtracted from your paycheck before taxes, pre-tax contributions may allow you to save more than traditional after-tax investments. For example, consider a person earning $3,000 per month who wants to save $200 a month in a retirement plan. Putting this amount in the plan instead of a regular after-tax investment saves $66 per month, or $792 in taxes each year.
What to do with your money
You’ve seen why you need to invest on your own—starting today. What’s the best way? Step No. 1 according to many financial professionals is joining your employer’s retirement plan. You not only save, you also get tax advantages.
With tax-deferred growth, you pay less in taxes, meaning more money for your retirement. Even small contributions can add up, thanks to what’s been called the “eighth wonder of the world”-compounding. With compounding you earn interest on the interest you’ve already earned. Your money grows slowly at first, but as time goes on it grows faster. Here’s an example comparing investing $200 a month starting at age 25 to starting at age 35. Waiting 10 years could cost you more than $400,000. You now know how your employer-sponsored plan works. Next up, finding an investment strategy that satisfies your level of comfort with investment risk. There are three major types of investments: equity securities, fixed-income securities, and short-term debt and capital preservation investments.
Equity Securities
Equity securities give you ownership in a company. Their value usually goes up and down based on the perceived value of the company. Historically, equity securities—which are generally considered growth investments—have had the highest potential for gain over the long term, but their value can fluctuate quite a bit in the short term. Stock funds, such as growth funds, income funds, balanced funds, or international stock funds, fall under this category.
Fixed-Income Securities
Generally, when you buy a fixed-income investment, you are loaning money to a government entity or corporation. In return, you receive set payments of interest over a specific period of time, and the return of your principal at the end of the period. Fixed-income securities provide a source of current income and usually have lower rates of return than equity securities.1 Fixed-income investments are generally considered sources of moderate growth and income and can include:
• Corporate bonds
• U.S. Government bonds2
• Bond funds