Posted by Matt
You're in a great place now: You're out of debt, living on a budget, and you've got a cash cushion for emergencies. BUT, you're only in a great place FOR NOW. Have you thought about your future?
Now that your savings is established, you should put that "extra" income you've got each month to work.
NOTE: Depending on how long it takes to get through the first few steps, some advisers might recommend starting your retirement savings account earlier, even if you can only invest a small amount each month. This is because TIME is as important as MONEY for long-term investing; you will see a huge benefit from compounding, so start as early as possible. I've only waited this long to start discussing retirement because I felt that the earlier steps should be given higher priority.
You should start by contacting your employer's HR department to find out if they offer a 401k (for-profit companies) or 403b plan (similar, but for non-profits) . If so, ask to be enrolled in an automated withdrawal plan. Here's why:
- This is the easiest way to contribute
- The money you invest comes out before taxes, which also reduces your taxable income
- After a while, you won't even notice the money allocated to retirement
- Many companies "match" employee contributions up to a certain percentage of gross pay, so make sure you AT LEAST contribute enough to get the full match. This is FREE MONEY!
One great tip I was given is to try to increase your contribution level (assuming you aren't able to start with the maximum contribution available by law) every year when you get a raise. I've never been able to confidently determine exactly how much is the right amount to contribute (one adviser I spoke with started her planning with the question "How long do you think you will live?"), so I'm trying to err on the side of too much (though I'm not contributing maximally yet).
Employer-sponsored plans typically require you to allocate your dollars to one or more investment vehicles (company stock, mutual funds, money market accounts, etc.). I'm certainly not a qualified investment adviser, but let me just tell you what I'm doing for now and I can maybe expand on it in a future post. I allocated 100% of my retirement dollars to an index fund offered by Vanguard, and there it will stay. I'm confident that following this strategy for the next couple of decades before retirement is a relatively conservative way to tap into the higher returns offered by the stock market (as compared to my trusty savings account).
That pretty much wraps up the series of posts outlining my plan. There is a lot more to know about personal finance, but my main plan is fairly simple. To recap:
- Budget and reduce expenses
- Eliminate debts
- Build and maintain an emergency savings account
- Work and contribute to my retirement account until it matures enough to support me and my family.
3 comments:
I think another important point with 401k plans is that you get to invest pre-tax dollars.
I tried to start out by investing the full allowed percentage in my 401k from the first day I started working. It was actually a great decision. I never missed the money and I just kept investing the max year after year.
I am shocked at how many people I talk to who have not joined their company's 401k (or 403b), and that doing so has been on the "back burner" for years (sometimes well into their 30's). These people are now kicking themselves for not saving early, and missing out on the company match money.
Great post and as a former HR manager who practically begged her employees to enroll in the company 401k program, it's very sound advice.
My issue now is that I'm working for myself and am no longer part of an employer-sponsored 401k plan. I have multiple investment and IRA accounts, but am wondering what you would recommend as a good retirement savings target given: (a) my income is variable month to month, (b) my taxes are not automatically taken out of my pay so I must contribute estimated taxes quarterly, and (c) I may not know how much I can safely contribute to a retirement account until the end of the (tax) year.
Any tips?
The best tip I could give you would be to talk to an expert (preferably your accountant), but I'll share my opinion, also.
I'm a newly converted believer in the Roth IRA account, so I'd definitely suggest getting one of those and funding it to the maximum if possible. One great thing about IRA accounts is that you can fund them even after the calendar year is over, up to the federal tax filing deadline. You could sock your money away in a savings account for now and then figure out how much is safe to put toward the Roth after you've got your taxes all figured out for the year.
I've also heard of something called a Solo 401k that I believe is similar to the corporate-sponsored version, but intended for the self-employed. Check with your bank or broker.
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