A Retirement Guide for 20-somethings.
Why plan now?
If there's one thing that's certain in life it's uncertainty. Especially when you're young. What kind of work will you do? Will you get married? Have kids? Spend a lot on booze and fast cars? But the odds are that someday you'll be facing retirement. Will you be ready?
I know it seems a long way off, but you'd be surprised how quickly the time flies. Just wait til you wake up one day to find out you're 35, it's an eye opener. And what will you do when retirement comes? The company pension? Social Security? Want to bet either will be waiting for you after your years of service? Just look at the economy right now and ask yourself how you'd deal with it in 40 years.
But all is not lost! I'm hear to help. More importantly I'm here to give you a few tips on how to prepare for that dreaded day when your sitting on your porch, yelling at kids to get off your lawn. Because right now is the best time to get started, even if you're just working a minimum wage job.
Check the numbers
- Simple savings calculator -- Bankrate.com
Simple savings calculator from Bankrate.com to give you a place to help your planning.
Your basic savings acount.
Now, every bank offers you some form of savings account. And generally they pay 1-2% in interest each year. I get better return from my grandmother. But wait, don't dismiss them just yet. Let's say that you just got your tax return back, and you've got a check for $1,000. You decide that you are just going to put that money away in a savings account until you retire in 40 years. At the current rate of 1.05% annually, that money will be worth a grand total of $1,519. Well, that's pretty much squat, but then so is the effort we put into it. Let's say then that we decide to that we can afford to add $100 a month to that account. That's about $3 a month, or less than your daily latte, and now it jumps to $60,791. Now that looks better.
It's all about the joy of compound interest. If you've got the time even a small amount each month adds up to a good sized payday. Of course, 1.05% interest is still pretty measly. There are any number of options that will offer a better return on your investment, but a basic savings account is a great place to start.
Once you've built up your savings, you may find that you want to want to increase your rate of return. Time to look at CD's and money market accounts. Certificate's of Deposit (CD's) are an investment tool for those who are looking for a regular rate of return over time. The are a fixed interest rate, which is nice for planning you future income, and the interest in higher than what your savings account is going to pay. The only problem is that you usually need a bit more money to start one than you would in a savings account. A money market account is a combo of savings and checking, with limits. They are intended as a place to save your money, and earn a higher interest rate than a savings account, but allow you to write a limited number of checks against the account each month. If you've got the money to open one, and can keep from spending the money, it's a great account to use once you've ready to retire and have fewer monthly expenses to pay for.
One problem that people often encounter is the difficulty in setting aside money for savings. Luckily many banks are ready to help out with this. Set up an automatic withdrawl from you checking account each month, or better still, have your employer direct deposit a percentage of each paycheck into your savings account. Most employers are more than willing to spilt the deposit between two accounts. Talk to your human resource manager.
A handy guide to 401(k) rules.
- 401k Rules
This article will tell you the basic 401k rules you should know. This is a beginner's guide to 401k rules and you should put more time into reading about 401k rules to be more proficient.
Speaking of Work
Never underestimate the power of the 401(k). One of the greatest inventions since the wheel, it's one way to generate free money! No really. Here's the deal. You have a percentage of each paycheck invested in a 401(k) account and you employer will match your contributions. Free money. Of course there are limits and many depend on your employer. For instance, your employer may only match a certain perecntage, say 50% of each dollar you put in. Or they only match the first 5% you contribute. And there are annual limits imposed by the IRS, for a typical single taxpayer, in the 20-50 year bracket, you can only contribute $5,000 each year to retirment accounts. The reason is that the money you contribute hasn't been taxed yet. Oh, hey, that's another way you're saving money: you pay less on your income taxes.
And 401(k) are your's. You can take them with you when you leave the company, along with the amount of employer contributions that you have vested. (Vesting: the percentage of your employers contributions that are officially yours. Your vested percentage increases the longer you stay with the company, with most employees being fully vested after 5.) Most 401(k) administrators allow you to pick how to invest your money, within the products they offer, which really let's you decide how aggressive or conservative you want to be with your money.
Some great sources for more
The Stock Market
You can't talk about saving for retirement without talking about the stock market. However, a full discussion about the ins and outs of stocks is beyond the scope of this Hub. That being said, the stock market is still the best way to grow your money quickly. It offers the best long term growth rate, and if you're sensible, it's fairly safe. I know that the recent economic crisis has cast a shadow over the exchanges, but I have to say I really feel that, in the long run, the market is the place to make money. Yes, there is risk. But where there is reward, there will be risk, and as the reward money goes up, so does the risk.
But there are strategies that you can use to better ensure your money grows, overall. First, notice that i keep using the term "long run". The market is too complex for a beginner to make money in day trading, so stay out of it. Instead, focus on long term yield. I'm a big fan of buying company's based on dividend yield in combination with dividend reinvestment. Most company's and brokers offer DRiP's. dividend reinvestment programs that immediately use your quarterly dividend to buy more of the company's stock. Think of it as interest paid in the form of company ownership and each quarter your share of the company dividend grows. In 40 years, you'll find that even a modest investment will have grown considerably.
There are other routes you can go. For instance you can buy growth stocks, companies that don't offer dividends, but expect to increase their stock price over time. A newer innovation has been the Exchange Traded Funds, stock portfolios composed of individual stocks that are often grouped by sector (health care, technology, or consumer goods, for example) or goal (for instance the fund may be trying to achieve aggressive growth, or high dividends), and are bought and sold like stocks. The advantage of these funds is that they change the degree of risk and price fluctuation you would see if you owned all the stocks individually. These types of funds are often seen as part of 401(k) portfolios, and are a great way to develop a balanced portfolio easily.
And of course there are still hundreds of other options like bonds (tax-exempt municipal bonds are a great way to grow your money tax-free), commodities, currency (stay away from Iraqi Dinars; most of what you hear about them is balony.) and a variety of other things. Home mortgages, for instance, were bundled and sold as securities, and see how that worked out. If you're interested in these things, I highly recommend you take a few finance courses, at the college level first. It's not an area you want to walk into blindly.
What it all comes down to is planning. Taking a little time, and a little money now, will prepare you for a comfortable retirement later. And remember to take a little time each year to review where you're at as well as where you're going. Do the maintainance tasks like making sure your financial institutions have the correct information and that your employer is doing their part. Consider consolidating accounts, especially if you have a number of old 401(k)'s floating around from previous employers (I have one with $.08 in it from an old employer. It probably costs them more to send me the quarterly statement, but I haven't the heart to close it!)
And don't put it off. Get started now, while you can take full advantage of the time ahead of you. Remember that someday, no matter how much you love what you do, you're going to want to stop and smell the roses, if those dang kids would just get off your lawn!