Sooner Is Better: 7 Steps to Get your Retirement Savings under Control
By James Toto | April 22, 2015
So, you're in your 30s-on your way, but not yet at the top of
the heap. Maybe you're recently married or have a couple of
kids. Life is expensive! There are mortgages, cars, school costs,
college funds, and a host of other things you must spend money
on. But there's a nagging voice in the back of your mind telling
you that you need to save for retirement.
Retirement is more than 30 years away, and how can you save for it when your mortgage is half of your monthly take home pay? Besides, you have $35,000 in an IRA from your first job, when you were single and rich. There's plenty of time, right?
Experts agree that today's 35-year-old will need $2 million in assets to retire at age 70. Using a 6 percent after tax yield, you would need to save almost $1,500 per month to accumulate $2 million. If you wait to start saving in earnest until age 45, this monthly requirement more than doubles.
So, how do cash-strapped workers save enough for retirement? Here are seven steps to get your retirement saving plan under control.
1. START NOW
As discussed, time is not on your side. The sooner you start saving, the easier it will be to reach your goals. There are many retirement plans that an employer or a self-employed individual can participate in, so make sure you find out what is available and start participating right away.
2. STOP BAD SPENDING HABITS
The best way to save more is to cut out bad spending habits. Austerity isn't fun, but look for areas where you can make cutbacks. Whether it is eating out, buying too many pairs of shoes, or other indulgences, try to set a reasonable budget and stick with it. Alternatively, look for ways to earn a few extra bucks-perhaps through a hobby-even an extra $50 a month can mean a nice dinner out without tapping into salary dollars.
3. WORK BACKWARDS
You need to set a defined nest egg goal based on your vision of your retirement. This involves using either a retirement calculator (these are abundant on the Web) or a spreadsheet to figure out the numbers. This can be as complicated or simple as you want, but you should either come up with a number that you can plan toward, or use the $2 million suggested above. The amount you'll need varies on the age at which you plan to retire and how much you plan to spend in retirement, among other variables. The important thing is to create a workable roadmap.
4. PARTICIPATE IN YOUR EMPLOYER'S RETIREMENT PLAN
There is nothing better than free money, and if your employer offers matching contributions, you must find a way to participate so that at the very least you make sure you receive the full match that you are eligible for. Your first call after reading this article should be to your HR department to find out how to participate in and take full advantage of the matching program.
5. CONVERT TO ROTH IRA
One of the more significant changes in workplace culture in recent years is the fact that people change jobs more frequently. If possible, convert all of your 401(k)s and IRAs into Roth IRAs. Roth IRAs essentially allow you to prepay tax and, as such, are an excellent form of retirement savings because Roth accounts are tax-free when distributions are made in retirement, whereas distributions from traditional plans are taxable.
6. FUND COLLEGE PLANS
If you have babies or toddlers at home, their graduation march will be here before you know it. If you begin funding their higher education now, you will have to pay less out of pocket when they begin attending college. College savings plans are my personal favorite financial tool for this purpose, but parents can also use custodial accounts or maintain separate accounts earmarked for college. Regardless of the method, don't procrastinate on college savings.
7. PLAN ON SELLING YOUR HOME AS SOON AS POSSIBLE
Downsizing can provide additional liquidity in retirement. Financial planners do not always agree on the benefits of home ownership, however the trends cannot be ignored. The Case- Shiller index has more than doubled since 1987, and while it has been more volatile as of late, the same can be said about nearly every asset class. There is no reason not to count your home as an asset for retirement planning purposes. As such, it is a good idea to plan on selling the samily home and looking for smaller accomodations to help fund your retirement.