Retirement is one of the biggest financial milestones in a persons life. Consider these planning tips:
Start early: It is never too early to get started (ideally, begin saving in your 20s). To the extent possible, you may want to arrange to have certain amounts taken directly from your paycheck and automatically invested in accounts of your choice such as 401(k) plans or payroll deduction savings. This arrangement reduces the risk of impulsive or unwise spending that will threaten your savings plan; the money is out of sight, out of mind. If possible, save more than you think youll need to provide a cushion.
Understand your investment options: You need to understand the types of investments that are available, and decide which ones are right for you. If you dont have the time, energy or inclination to do this yourself, hire a financial professional. He or she will explain the options that are available to you and assist you in selecting investments that are appropriate for your goals, risk tolerance and time horizon. Note that many investments may involve the risk of loss of principal.
Use the right savings accounts: Employer-sponsored retirement plans that allow employee deferrals such as 401(k), 403(b), SIMPLE, and 457 plans are powerful savings tools. Your contributions come out of your salary as pre-tax contributions, reducing your current taxable income, and any investment earnings are tax deferred until withdrawn. These plans also can allow after-tax Roth contributions. While Roth contributions do not offer an immediate tax benefit, qualified distributions from your Roth account are federal income tax-free under most circumstances.
Make the company match your minimum: Many companies are willing to help you prepare for retirement, but only under the condition that you have some skin in the game. One of the most popular and easiest ways to get more bang for your buck is to contribute at least as much as your company is willing to match. Some companies match 50cents for every dollar you contribute; others are more benevolent. Regardless of the amount your company is willing to contribute on your behalf, do not leave your future on the table by neglecting to take advantage of this employee benefit.
Increase your contributions regularly: Most people desire a long, prosperous retirement. What few realize is that any expenses that your pension or Social Security does not cover must be satisfied by your other assets. Therefore, it is wise to consistently increase how much you contribute to these accounts so that you can increase your chances of saving enough to sustain you for the rest of your life. Some options include taking advantage of an option to automatically increase your 401(k) contributions at work at intervals that you decide. Another option includes making a conscious decision to manually increase your contribution based on annual events or milestones such as a birthday or promotion.
Invest a percentage of your income: When making contributions to your retirement plan at work, some people opt to contribute a set dollar amount of their pay instead of a percentage. It may be easier to conceive contributing $100 per pay period instead of 4 percent of their income, but this practice makes it harder to accomplish your goals. The reason being, as you receive pay raises, promotions, and bonuses, your contribution will remain fixed at $100. However, if you contribute a percentage of your income, then the amount you contribute will increase along with your income. In essence, the more money you earn, the more contributions you make, and the closer you get to your retirement goals.
Life is a journey. Plan for it.
Neil A. Brown is a CPA and CFP with Burkett Financial Services in West Columbia. Reach him at www.uscneil.com or (803) 200-2272. Ashleigh Brooker, CFP, is the principal of A.J. Brooker Financial Associates in Columbia. Reach her at info@AJBrooker.com or (803) 724-1235.