The last thing you want to be worrying about post retirement is financial security. That’s why it is important to think about retirement early. To help you get on the right track, here are six tips for saving and investing for retirement.
1. Live below your means.
Spend less money than you make. It’s a simple enough philosophy but can be a difficult practice. However, the bottom line is you cannot save for retirement while spending more than your income. Cutting your spending can be as easy as making meals at home or holding off on making impulse purchases. Meeting with a fiduciary is a great way to get advice on how to stop spending and start saving for retirement.
2. Use your employee benefits.
If your employer offers a company retirement plan (401K, 403b, 457, TSP, etc.), take advantage as soon as you’re eligible. Many companies offer a company match in which the employer will match a percentage of your contributions to your retirement account. This is essentially free money, so don’t miss out.
The longer you stay at a company, the more likely you are to receive a pay increase. When your company offers you a pay increase, reserve half to be put into your 401K. You won’t miss money that you never had and you will thank yourself later for using your raise wisely.
3. Pay attention to investment costs.
Do you know the annual expense ratio of the funds you own? Investment costs can add up quickly, and the reality is that loaded mutual funds (mutual funds that require you to pay a sales charge or commission to a broker) do not perform better than no-load funds.
For example, a $25,000 investment could grow into $68,975 after 15 years growing at 7% per year with 2% fees. Meanwhile, a $25,000 investment will grow into $90,438 after 15 years growing at 8.95% per year with 0.05% fees. That’s a huge difference in the money you could be saving for retirement!
4. Prioritize saving for retirement.
There are many costs and expenses that may seem more important than your retirement fund, especially for those who will not be retiring anytime soon. For example, taking care of your child’s college fund may seem more pressing. However, if you have to choose between saving for college and saving for retirement, always choose to save for retirement. You can borrow for college, but you can’t borrow for retirement.
5. Think long term when investing for retirement.
It can be tempting to pull money out of the stock market whenever the economy fluctuates. Instead, be a long-term stock market investor and view market corrections and bear markets as “buying opportunities” and not as “risk.” Investing for retirement means controlling your emotions when there are short-term fluctuations by using courage and patience.
6. Put money into a Roth IRA
Lastly, see if you are eligible to maximize your savings in a Roth IRA. Investment growth inside your Roth will be tax free if your investment is open for a minimum of five years.
If you are married, remember that only one spouse needs to work to be eligible for two Roth IRAs. In 2017, individuals under 50 years old can contribute a maximum of $5,500 per year to their Roth IRA. After turning 50, the maximum increases to $6,500 per year.
Keep increasing your savings for retirement until you are saving at least 15% of your take home pay.
When life gets busy, it’s easy to procrastinate investing for retirement and prioritize other financial obligations. Following these tips will help you prepare for the retirement you have in mind.
Lorenz Financial Services, LLC is a Lafayette, Indiana fiduciary who offers financial planning and portfolio management services. If you have questions about who we are or our services, please contact us at (765) 532-3295 or email us.