Saving money is always difficult, but when it comes to saving for retirement, it becomes especially challenging. Many people don’t know when to start, how much to save, or how to keep track of their portfolios. However, following some simple steps, doing your research, and staying disciplined can help you efficiently and successfully prepare for your retirement.
Retirement is a liability that will be funded either now, over time through installment payments, or at the time you stop working. For most of us, installment payments are the most realistic method of accumulating a sufficient nest egg. It’s never too late to start saving for retirement. In 10 years, you will be very thankful you started saving, no matter what age you start.
Not everyone has a financial planner to guide them through investment and retirement options. It's important to realize that if you have a nickel to your name, there is someone out there trying to find a way to take it from you. With 15 years of experience as a financial planner, I can tell you with certainty that if it sounds too good to be true, then it usually is! If the best return you can get on a 10-year treasury bond is 2% and a 5-year investment is offering 10%, something just doesn’t add up. Do your homework by consulting various sources of information and form your own opinion.
If you own a financial product then someone sold it to you. Chances are, that particular salesman isn’t in that business any longer or they made their commission and have little interest in contacting you unless you have more money to offer. Therefore, it’s up to you to monitor your investments and it’s easier than you think. A good financial planner is always the best option. If you don’t have such a relationship, then call the 1-800 number on your last statement and ask to speak to someone that can explain the details of your investment. Your gut is usually right on these things. Also, if you have assets invested, another advisor would be happy to review them with you. Their opinion may be skewed towards purchasing another financial product, but at the very least you’ll be getting a cynical professional view of your investment. Again, trust your instinct, because it’s usually right.
Slow and steady wins the race. Several people make an average income, but because they let the time-value of money work its magic, they have saved more than individuals making twice their income inside their retirement plans. They also live within their means and do not look at saving for retirement as an option. They are committed to it and make a point of doing it.
This doesn’t mean that you should be paying 3% per year to have your portfolio managed by a professional. Unless you are prepared to take on the burden of monitoring the financial markets and choosing the correct investments for your given situation, then you should definitely consider working with a professional. Typical management fees from credible professionals typically range from .50% to 1.5% depending on complexity of the case and the dollar amount of assets that are being managed for a particular household. You may find that companies will manage your assets for less, but they will not offer comprehensive financial planning, specific recommendations, adjust for current economic times, and alert you when a change needs to be made in order to help protect what you have or maximize potential gains. 1% per year isn’t that expensive when you think of the potential impact a wrong move or missing an opportunity could have on your portfolio.
Saving for retirement is extremely important, but working towards a mortgage and debt-free retirement is just as critical. If you have met with a financial planner and determined that a mortgage would not be too burdensome, then there may be more efficient uses of your money than paying down a mortgage or other low interest-rate debt. Even if your mortgage seems insurmountable and there is no way to have it paid off at retirement, continue to take steps towards decreasing your debt. The decisions you make now can have a tremendous impact on your options during retirement.
Working towards your retirement goals can be daunting. Realistically, there is often a difference between what you can afford to put away now and what you need to put away to reach your goals. First, do what you can now. As your life situation changes you may be able to increase your savings rate. The key here is to live within your means by paying your bills, saving for retirement, and minimize optional spending as much as possible.
Has anyone ever told you to be careful of your old habits? That old, small 401(k) balances may be tempting and seem like free money. But, by cashing them out, you are not only paying unnecessary taxes and increasing your income base, you are also dis-incentivizing yourself to contribute to saving anything for retirement. Each time you admit defeat and cash out, you will be more likely to do it again and again. Let human nature work in your favor. Keep that old 401(k) intact or roll it to an IRA, add to it, and nurture it. The act of doing this will make you more likely to add to your new plan at work, continue your IRA contributions, and take your retirement planning more seriously.
It is true that social security could replace a significant percentage of your pre-retirement income… if you retire making $25,000 or less per year. Social security was not created to be a significant source of retirement income. The Social Security system was developed to keep seniors out of poverty, no more and no less, and it does just that. If you can accumulate funds that will result in an income stream that replaces 60% of your pre-retirement income, then you will most likely be in good shape for retirement.
Only borrow from your 401(k) if you are confident that you’ll be at your current employer for at least five more years. If you do borrow from your 401(k) plan and change jobs, the outstanding balance will become due immediately. Loan balances do not transfer over just like the 401(k) assets balances. If you are confident that you will be with your current employer long enough to pay the loan back, then only borrow from your 401(k) to pay off high credit card debt or to purchase a home. Be careful of the precedent that you set for yourself. Your 401(k) is not to be looked at as an available asset. The penalties and effect on your retirement outcome can be severe if you keep a running loan balance and change jobs a few times.
Whether you’ve been saving for retirement for 20 years or you have your head in the sand when it comes to putting money away, it is important to remember that it is never too late to start and there are always resources to support your efforts. Take the time to do your research and dedicate yourself to achieving your goals. You will be grateful in the long-run for being disciplined about planning for your financial future.
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Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Independent Financial Partners (IFP), a registered investment advisor. IFP and Retirement Benefits Group are separate entities from LPL Financial.
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