Rethink your retirement plan
8. Rethink your retirement plan.
If I鈥檝e done one thing right with my personal finances since reaching adulthood, it鈥檚 been taking care of my retirement. I鈥檝e consistently put a significant amount away for that future day when I no longer work and I鈥檓 ahead of the retirement curve for my age in almost every way you could measure it.
Having said that, of course, I鈥檓 in the huge minority there. Many people my age have scarcely thought about retirement. I regularly get emails from readers in their forties and even in their fifties that are just now beginning to think about retirement savings.
That鈥檚 a bad idea. Regardless of your age, the sooner you get started with retirement savings, the better. The more years you give yourself to save before retirement, the less you have to take out of each paycheck for retirement.
Getting a grip on your retirement plan really boils down to answering three questions.
Where are you at right now?
The first step is to understand what retirement savings you have built up right now and, to a lesser extent, what types of investments that money is held in.
Make a list of all of your financial accounts and their balances. This will, of course, require you to dig out all of those statements and log into your online accounts to retrieve this information (unless you鈥檙e using something like Quicken).
The purpose here is simply to get a grasp of the totality of your retirement savings. You need to know what you have before you can plan intelligently for the future.
Where do you need to be?
Once you have this information in front of you, you can use a to get an estimate of what you will actually need at retirement.
Personally, I find such software to be fairly good at giving you a starting point for your calculations, but almost every time, they tend to underestimate what you鈥檒l actually need to do to get there.
Why? They tend to assume a very mundane rate of inflation while also assuming a more-than-healthy return on a diversified investment portfolio. If you know of a retirement portfolio that鈥檚 guaranteed to return even 7% over the next 30 years, I鈥檇 love to see it.
So why do I encourage people to use such software? First of all, you don鈥檛 have to use the default numbers they give you. Most people plug and chug with the default numbers at MSN, which suggests a 9% return on investment. Turn that down to at least 5%, if not lower.
Remember, it鈥檚 not a bad thing to save too much for retirement, but it is a very bad thing to not save enough for retirement. You can always retire a bit earlier or live a very robust retirement, but you don鈥檛 want to find yourself at age seventy or so without any ability to retire.
How do you get there?
So, how do you get from here to there? The will give you a suggested amount for annual savings, and you should use that as a bare minimum.
Where do you save that amount, though? You鈥檒l hear a lot of people tossing around suggestions of Roth IRAs and 401(k)s, but here鈥檚 the real truth: 99% of the worry about retirement savings is just simply doing the saving, regardless of where you put it. Compared to the concern of not banking nearly enough for retirement, the issue of having a Roth IRA or a 401(k) pales in comparison.
My rule of thumb for most wage earners is if you鈥檙e eligible, open a Roth IRA with some brokerage (I use Vanguard, but do your own research). This lets you be completely in control of the account. Also, money in a Roth IRA can be withdrawn at retirement age without any taxation at all, which is a nice perk, but the drawback is that you鈥檒l be funding it with after-tax dollars 鈥� meaning the money comes directly from your paycheck. I usually recommend a Roth because I believe taxes will inevitably have to go up from where they鈥檙e at right now.
If you don鈥檛 know what to invest in among all of your choices, choose a 鈥渢arget retirement鈥� fund that matches when you expect to retire. These investments will automatically balance your money for you, ensuring that you won鈥檛 be completely exposed to stocks close to retirement age (so that a big downturn like 2008 won鈥檛 sink you), but also gives you a great chance for growth now, when you鈥檙e young.
Regardless, the important thing is that you鈥檙e saving an appropriate amount. That鈥檚 the real key here. Today is the day to get started, if you haven鈥檛 already.
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