Saving For Retirement
Saving for retirement is scary and stressful for many people. At first, it seems so far away and you say “I won’t start saving just yet, I have time” and suddenly you are months away from retiring. Life goes by very fast, so you need to make sure that you are prepared for what comes after your job. The average length of retirement is 18 years, which means that you have to live for 18 whole years without income from a job. As life expectancy increases, so will the length of retirements. So what are some things that you can do proactively in order to ensure a great retirement?
Initially, make sure that you have money that you can save. Spend less on unnecessary things like a new Porsche or a $10 million mansion, and put more into your retirement accounts. Many employers offer 401(k) plans, which will allow you to invest your money tax-free. Many employers will match your contributions, which means that they will put in an amount of money based on what you put in. Some companies will match 100% of your contributions up to a percentage of your income, usually between 3% and 6%. This means that if you make $100,000 a year and put in $10,000, your employer will match it up to $6,000 if it is 6% and $3,000 if it is 3%. 401(k) plans can vary and are usually specific to the company, so you need to familiarize yourself with them based on who you work for. However, for all 401(k) plans, the annual contribution limit is $19000. Traditional IRAs and Roth IRAs are also very good for retirement savings. They both provide quite generous tax benefits but have some differences, which you can look at here. Both IRAs have a contribution limit of $6,000 for those under 50 and $7,000 for those over 50.
Retirement accounts can be confusing and you won’t be allowed to withdraw money from them until you are in your 50s. What if unforeseen events happen and you need that money now? While they might not provide the tax advantages that retirement accounts do, you can always use normal investment accounts. While you might have to pay capital gains taxes on your profits, it might be worth it to provide you flexibility with your money. Keep in mind that this is a retirement account, so don’t treat your investments like roulette bets. While betting everything on red may sound appealing, leave that to options traders on Wall Street. Diversify your holdings, don’t put everything you have into one stock. This strategy is safe and, as long as you are invested for long enough, will turn a profit during pretty much any time period. From 1999 to 2009, the only asset class that had an annual return below 0% was domestic large-cap stocks, and if your portfolio was correctly diversified between the six main asset classes you would still see annual returns above 4%. Keep in mind, this decade ended with the worst economic downturn since the Great Depression. ETFs (exchange-traded funds) and Index Funds are great choices for someone that doesn’t want to actively manage their investments, and they provide good returns. SPY, an ETF that follows the S&P 500 index, has seen average annual returns of 15.19% in the past 10 years. If you still don’t believe that stocks are reliable, you may want to invest in bonds. You can buy US treasury bonds directly from the government or you can invest in ETFs centered around bonds. Bonds generate lower returns than stocks, but they give you much more security. Always keep in mind that investing can be risky, so as you get older try to convert a larger percentage of your investments into bonds or even cash. Don’t feel like you are burning money if you have it in a savings account because (barring any apocalyptic event), you can never lose money sitting in a savings account. Investing for retirement should not scare you, nor should it be something that you take lightly. No matter how bad the economy may look, always have faith, because the market will always come back, and if it doesn’t, then you will have bigger problems than retirement (such as an alien invasion, zombie apocalypse, or any other world-ending event).
Retiring can seem like a monumental task, and may appear to be impossible when you are young; however, you should never underestimate the power of compounding returns. What might be a minuscule amount now could turn into millions of dollars in the future. Saving for retirement is very rewarding and doing so effectively allows you to have more freedom later in life.