Everyone knows that saving for retirement is important. Unfortunately, far too many of us aren’t saving nearly as much as we should.
But why? A recent investing and retirement survey from Charles Schwab shed light on this issue, and with telling results.
Out of the 1,000 adults ages 25-70 who responded to the Schwab poll, a full third said they weren’t saving enough for retirement because they didn’t want to make lifestyle sacrifices today. Yep, you read that right. Instead of saving enough for retirement, 33% of your neighbors are living it up and choosing to worry about the future, well, in the future.
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But that’s not all. Another 31% of respondents said unexpected home repairs and bills were standing in their way, while 26% blamed their lack of savings on everyday bills. Meanwhile, 24% were too busy focusing on credit card debt to worry about retirement, and 22% were choosing to prioritize college savings for their kids.
You get the picture. When it comes to actually saving money, coming up with a reason to procrastinate is easy as pie. For some people, it’s bills, roof replacements, and credit card debts that stand in the way. But for others, it’s dinners at Applebee’s and Florida vacations. Sounds about right.
Unfortunately, the consequences can be dire if you’re one of those putting off investing for retirement altogether. Without a nest egg, you could easily wind up struggling in old age, living paycheck to paycheck, or — worse yet — working until you die.
Fortunately, it’s never too late to start investing for your inevitable golden years. But for many people, knowing where to start is the hardest part.
Not Investing Yet? Here’s What You Need to Do
If you’re not investing and saving for retirement yet, it’s time to take actionable steps to change that. Consider these tips from some of the top financial planners in the country:
Quell your fears
Although the recent market correction caused a firestorm, it’s important not to make decisions out of fear or weakness. At the same time, investors have reason to tread cautiously, says Michael Ojo of Golden Door Asset Management. Instead of panicking, Ojo suggests looking for hidden opportunities.
“More active participants will find numerous investment opportunities for the long term hidden during this turmoil,” says Ojo. “If you do not invest yet but have been thinking about it, then this may be a great time to begin.”
In the meantime, it’s important to remember that investing for retirement is a marathon, not a sprint, says Shannon McLay, financial planner from FinancialGym.net
“If you are not investing because you have a fear of losing money, you need to remember that investing is a long-term commitment and the money that you invest in the stock market should be money that you won’t need for more than two years,” she says. “The markets will always move up and down like a roller coaster; however, over time, you should see your portfolio grow.”
Obey the power of compound interest
As the Schwab poll shows, a lot of people don’t save enough for retirement because they prioritize their debts above all else. That’s a mistake, says Joseph Hogue, investment analyst from PeerFinance101.com.
“Spending is too much fun and you may never be completely out of debt,” Hogue says. Even worse, “waiting to start investing means you miss out on the power of compound interest and may never get started on your nest egg.”
According to Hogue, you should try to put at least 5% of your income toward a retirement or investment account, even if you’re paying down debt. Then, when you’re debt-free, ratchet it up to 10% or more.
Melissa G. Sotudeh, a Certified Financial Planner from Halpern Financial, is advising her adult son the same as he enters the workforce.
“I’m recommending that he start out saving 10% right off the bat, and increasing that percentage every year,” Sotudeh explains. “He’s used to living the life of a poor student, so it’s easier to start off on the right foot — and rewarding too, because compound interest is so powerful when you start investing early.”
Make sure you’re taking advantage of your work-sponsored retirement plan
While all the advice offered so far is excellent, the question most people want to know is where to invest. According to Sotudeh, you should start with your work-sponsored 401(k) plan, if you have one, and work from there.
“At a minimum, you should contribute enough for a match, usually around 5%,” says Sotudeh. And if it feels like you don’t have enough money to save, Sotudeh recommends looking at the big picture.
“Retirement plan contributions are taken out of your salary before taxes,” she says. Think of it this way: “Would you rather have 75 cents in your pocket after taxes, or a whole dollar in your investment account?”
Matt Becker, financial planner and author of “The New Parent’s Guide to Financial Independence,” echoed that sentiment, adding that it’s important to take advantage of the “free money” your company may be offering. And if you’re worried about getting the ball rolling with your work-sponsored plan, don’t stress; instead, reach out for help, says Becker.
“As a starting point, ask your HR rep how you can set up automatic contributions from your paycheck, and how much you should be contributing to get the full employer match.”
Consider easy long-term investments
If you don’t have a work-sponsored 401(k), are self-employed, or simply want to invest extra dollars beyond your company’s 401(k) match into a plan you design, you have a ton of options. With that being said, the best strategy is often the simplest, says Hogue. In other words, you need an investment strategy that you can “set and forget.”
“The worst thing a long-term investor can do is to fixate on the daily — or even yearly –performance in stocks and lose sight of their long-term goals,” says Hogue.
That’s probably why several of the financial planners we spoke to suggested investing in index funds, or specifically target-date funds that are designed to adjust your holdings for you as your retirement approaches.
With these investments, the portfolio managers pick the stocks and bonds and manage them daily, and you just have to decide how much risk the portfolio should take.
“If you won’t need the money for a long time, then pick a later target date fund or a more aggressive asset allocation fund,” says McLay. “If you need the money sooner, then pick an earlier target date fund or a conservative asset allocation fund.” It’s as simple as that.
Take advantage of your IRA options
But where should you set up these index funds and target date funds? According to the experts, a traditional IRA or Roth IRA is a good choice. Thanks to generous IRS rules, anyone who earns an income can contribute to a traditional IRA. Meanwhile, married couples with a combined modified adjusted gross income (MAGI) of less than $183,000 can opt to max out a Roth IRA instead.
The main difference between the traditional IRA and the Roth is how the money is taxed. While traditional IRA contributions can be taken as a deduction at tax time now, you’ll pay taxes when you begin taking contributions in retirement. With a Roth IRA, contributions are made with post-tax dollars now, but are eligible for tax-free withdrawals when you retire.
With either type of IRA, the most you can contribute each year is $5,500 (for 2014 and 2015), or $6,500 if you’re age 50 or older by the end of the year.
Either investment option is a good one, but the best option probably depends on your tax outlook in the future. Many experts say that, if you believe your tax rate will be higher in the future, you should choose a Roth. Meanwhile, if you think your tax rate will be lower in the future, you should invest in a traditional IRA and pay taxes on the money later. It’s your choice.
Daniel Zajac, certified financial planner and author of the Finance and Flip Flops blog, is partial to the Roth for those who are eligible.
“Establish and max-fund a Roth IRA,” says Zajac. “Open a Roth IRA and contribute the maximum allowable amount. If you have money sitting in the bank, you should definitely consider moving it into a Roth.”
According to Zajac, you can open a Roth IRA at your bank, at an online provider, or with a financial advisor of your choice.
If you’re comfortable with it, turn to online options
And when it comes to where to invest your money, Zajac’s advice highlights part of the challenge. In today’s technology-fueled world, it’s time we all become comfortable with our online investing options.
Fortunately, online investment firms like Wealthfront, Betterment, and Personal Capital exist to help in your investing journey. Also, sites like Motif Investing and Drivewealth are there for investors with smaller starting balances. With so many online investing options, it’s really up to you to pick the right firm to invest your retirement dollars.
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To set yourself up for success, Zajac suggests automating the process. Typically, that just means calling your bank and setting up a monthly deposit right into your investment account. You may even be able to do it online.
“By setting up a systematic investment that goes from your bank account to your investment account, you force yourself to save,” says Zajac. “Most people don’t have the diligence to write a check every month. By automating the process, you force yourself to save and invest!”
Consider a fee-only planner
If all of this stresses you out, you’re not alone. The fact is, some people can’t or simply don’t want to take care of their investments. When that’s the case, it might be wise to hire a financial planner or other professional to help manage your accounts.
“If you don’t want to learn anything about investing and want someone else to manage it for you, then find a fee-only financial advisor to provide you with guidance and advice,” says Kirk Chisholm, financial planner and author of InnovativeWealth.com.
Where some financial planners are paid a commission based on which types of investments they sell you, fee-only financial planners are paid one flat fee for the best advice they can offer. Since many people are concerned about being sold bad investments that pay high commissions, hiring a fee-based planner is one way around that.
And while hiring a personal financial planner doesn’t guarantee a better outcome than if you had handled things yourself, it can provide you with some peace of mind and help you steer clear of big mistakes.
“While no one can know the future about how your investments will perform, an experienced professional can at least guide you in the right direction and away from the lemons,” explains Chisholm.
If you decide to go this route, try using a firm like XY Planning Network that only uses fee-only planners.
While financial planners can sometimes have different ideas about exactly how and where to get started, they all agree with one basic principle — that you need to get started. Because when it comes to investing, the longer you wait, the harder your investments will have to work to catch up.
As CFP Becker notes, another crucial lesson to remember is that it’s OK to make mistakes.
“For the first decade of your investment life, the returns you earn, good or bad, barely matter at all,” he says. “It’s your savings rate during that period that will really determine your success or failure as an investor. Keep the focus on saving more rather than finding the perfect investment strategy and you’ll find yourself with a lot more money down the road.”
And once you get started, stay confident in your decision and your investment strategy. When the market tanks, don’t panic and pull your money out. Remember that investing is for the long haul and the ups and downs don’t matter much in the big picture.
As Aja McClanahan from Principles of Increase is quick to say, time is money.
“Build confidence in your staying power,” says McClanahan. And when you’re ready, “up the ante for a consistent growth approach.”
What is your investment strategy? Have you started saving and investing for retirement?