When you’re in the early stages of your career, retirement planning often seems like something you’ll get to eventually. But retirement will arrive sooner than you think. Do your future self a favor by starting your planning today.
“Saving money now buys you more freedom later,” says Richard Kopcke, a visiting scholar at Boston College’s Center for Retirement Research. “A solid nest egg provides you with the security to change jobs or relocate without worrying.”
Plus, the sooner you start saving for retirement, the more you’ll eventually end up with, thanks to the power of compound interest. Here are some steps that can put you on your way to a financially fit future:
Set savings goals. Instead of making vague plans to “save more,” give yourself a definite goal. Using concrete numbers—either a dollar figure or a percentage—makes saving more attainable. According to Kopcke, most young workers should set aside about 12 percent of their take-home pay each year. The good news: That figure includes employee matching funds, so your out-of-pocket savings goal might be lower.
Change your thinking. It’s easy to neglect building your retirement savings in favor of other priorities. “Too many young people spend all their extra money on what they see as more pressing needs—paying off education debt, saving up to buy a house,” Kopcke says. “But if you let your retirement savings fall by the wayside, you’re really taking from your later years to spend today.”
Workplace retirement savings plans make it easy to contribute by pulling the money out of your paycheck automatically. If you’re not eligible for such a plan, you can set up automatic transfers to an individual retirement account (IRA). That way, the money is saved before you even see it. Just as you get used to the fact that taxes are deducted from your salary, you’ll adjust to this deduction as well.
Take advantage of any employer match. When employers offer to match your 401(k) contributions, they’re essentially offering you free money. But only half of Generation Y workers who are eligible actually participate in their employer-sponsored retirement plans. And more than 40 percent don’t contribute enough to receive the full company match.1 Remember: the power of compound interest. The sooner you start contributing, the more options you’ll have down the line.
Invest wisely. Young people can plan on saving over a longer period of time than their older counterparts. That means young people are better able to withstand market fluctuations and can be a little more aggressive in their investment choices. For that reason, young investors should consider investing a significant portion—70 percent or more— of their portfolio in equities, since stocks have historically offered better returns than bonds or other fixed-income options.
However, you should avoid getting bogged down in market minutiae. “People spend a lot of time thinking, should I buy this asset or that asset?” Kopcke says. “But for young people, it’s much more crucial to focus on saving enough.”
1 Hewitt Associates, "Retirement Readiness: Bridging the Gap Across Generations," December 2010.
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Fifty years ago, it wasn’t at all unusual for an individual to work his or her entire adult life for the same company. Today, however, by the time they reach age 50, the average baby boomer will have held nearly twelve different jobs.1 As a result, many people find themselves juggling multiple legacy retirement accounts that they’ve maintained at previous employers.