A Guide to Saving for Retirement
Saving for retirement begins early, and often we can overlook important steps unknowingly. Here’s a quick guide for making sure you’re getting the most out of your retirement savings.
Analyze your needs sooner than later.
The step most people skip is figuring out just how much money they’ll need in retirement. Try to consider your lifestyle. What are you expecting your retirement to be like? International travel? A second home? These are all things to consider when building your savings. You should also keep in mind that, if present trends hold, you may need to pay for much of your own health care because many employers are cutting or reducing the amount of money they spend on retiree health coverage. As you analyze your needs, take into consideration any other resources you may have to tap, such as savings outside a 401(k) or real estate when you do retire.
Don’t neglect your 401(k).
The best place to start when it comes to putting money away for retirement is your 401(k). After all, your company’s 401(k) retirement plan offers you one thing you’ll get few other places: free money. For every dollar the average worker puts into their 401(k), their employer contributes 50 cents.
Many people don’t contribute, or don’t contribute as much as they could. Be sure to add to your 401(k) as often as possible. For those who do, consider boosting your contribution to the max. The maximum number you can add per year to your retirement savings increases at the rate of inflation. Check with your employee benefits office to make sure you’re getting the benefit of your entire match. Government rules try to make sure that retirement programs aren’t being run for the benefit of top execs.
Get the allocation right.
Whether you’re saving in a 401(k) for the first time, or reassessing your current savings, you’ll want to make sure the mix of investments you have is right for your age and the amount of risk you’re willing to take on.
Remember, simply being diversified enough has a bigger impact on your returns than which funds you choose. Take time to examine the list of funds offered in your companies plan and toss out the ones that don’t fit your asset allocation. Keep in mind that your investment options may be limited, depending on what your employer is offering. If you have a question, check with your Human Resources department. Keep in mind that stellar short-term performance alone isn’t a reason to buy.
Try keeping it simple with a six-part approach: One large-cap fund, one mid-cap, a small-cap, an international fund, a bond fund, and a money market fund. For the more advanced investor with multiple savings goals, a well-diversified portfolio typically consists of owning 15 to 20 funds.
Put your finances on automatic.
If your problem is that you find it difficult sticking to a savings plan, then your best bet is to go automatic. This way your employer will take the money out of your paycheck before you have a chance to spend it, and put it directly into your 401(k).
If you don’t have a savings plan at work, or you have the ability to save more money than your 401(k) allows, consider investing elsewhere. You can open up an account with a bank or brokerage and instruct them to automatically debit the funds from your bank account.
And if you feel comfortable with this, you may just feel comfortable automating other areas of your financial life such as credit card and utility payments. Log onto your bank’s Web site for details.
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