The New Year is upon us, and with it comes resolutions to do things differently (read: better) in 2015. For many of us, that includes improving our money management.
Nearly 7 out of every 10 people between the ages of 18 to 29 and a sizable one-third of people ages 30 to 49 have not yet begun saving up for retirement, according to a Bankrate study. Given the high cost of comfortable retirement these days, that’s some scary news.
If you’re among these numbers, this New Year is a great time to get started on your retirement investing goals. Don’t worry if it seems like an overwhelming task at the beginning; these tips will help you ease into it the right way.
1. Save Roughly 10-15% of Your Income
In reality, the amount you should be putting aside for retirement can more accurately be described as “as much as you possibly can,” but we know it’s hard to get a grasp on that without numbers to guide you.
So try to aim for 10-15 percent of your current income, which is a rough guideline. For a more precise figure, sit down with your financial planner, who can help you understand how much you need to save in order to stay on-track with your goals. If you’ve gotten a late start, you may need to boost that percentage up to 20-25 percent to make up for lost time.
2. Calculate How Much You’ll Need
To get a handle on how much you’ll need to put aside by the time you retire, a good rule of thumb to assume is that you’ll want to replace approximately 70-85 percent of your final income. An alternate rule of thumb is to assume you’ll need 25-33 times your annual expenses.
Both of these formulas take into account the fact that your lifestyle will change come retirement—you won’t have certain expenses, like paying down your mortgage, anymore, but you will have other, new expenses like medical costs or hiring help around the house.
3. Don’t Focus Too Much on the Number in your Portfolio
Focusing on an arbitrary retirement goal, like saving up $1 million, can leave you short because it isn’t based on the standard of living you expect to maintain once you reach retirement.
Instead, think about how much you can realistically expect to spend per year during retirement—i.e., how much retirement income you’ll need to live comfortably. What will you need for your budget basics (groceries, utilities, etc.) and what additional expenses will you have (like taking that trip you’ve always dreamed of)?
The best way to prepare for a secure financial future is to get clear on how much money you will need for your circumstances, not how much the experts say you’ll need.
4. Find Out What Your Company Offers
If you’re not taking advantage of your employer’s retirement savings plans—or you’re not even sure if your employer offers one—there’s no time to waste. Sit down with an HR representative to find out what options are available to you.
Not only are employer savings plans like 401Ks and IRAs tax-deferred; some employers offer matching contributions to help you grow your funds faster. If you’re not taking advantage of that, you’re leaving money on the table.
5. Invest in a Mix of Assets
Your retirement portfolio should contain a mix of stocks, bonds and cash equivalents in order to maximize your returns and minimize the risk you face as a result of market fluctuations. The ratio of your allocations should be based on your age and risk tolerance.
6. Use Online Tools
There are plenty of online calculators and guides to help you do things like find the right asset allocation for you and see how on-track you are to hitting your retirement savings goals. You don’t have to be a financial whiz to understand them; many are written in laymen’s terms and can walk you through complex concepts step-by-step.
Don’t feel you need to understand everything all at once. Just get a basic grasp on terminology and concepts so you can sit down and have an informed discussion with a pro (see next section).
7. Talk It Out
Use what you’ve learned from the online tools you’ve visited as a springboard to facilitate a conversation with a trusted financial advisor. Your online research will give you a general understanding, but only a financial advisor can help guide you through the specifics of creating a retirement strategy that’s customized to your goals and needs.
Also use online tools as a springboard to have conversations with your spouse and family about money. You all need to be on the same page when it comes to long-term financial goals like retirement.
8. Make It a Priority
If you don’t think you’re on track to meet your retirement goals, look into ways you can up your earnings and/or slash your spending to enable yourself to put aside more. You may need to take on a second job, reduce your budget or skip the family vacation for a few years, but in the end it will be worth it when you know you’re able to retire without worry about how long your savings will last you.