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For a lot of people who are newly retired or nearing retirement age, one of their biggest financial regrets is that they didn’t focus on saving for their golden years. A Consumer Reports survey shows that only 28% of investors age 55 or older are highly satisfied with the way they’ve saved for retirement.
Topping their list of regrets is that they didn’t start saving earlier. According to the survey, those who got an early start have a net worth averaging $1.1 million. Those who began saving in their 40s or 50s lag behind by hundreds of thousands of dollars.
What, if any, lessons can you learn from folks who’ve already traveled the same path you are? Clearly, the first lesson is to start as soon as possible. And even if you’re too old to get an early start, start as soon as possible!
While retirement saving can seem complicated, getting started is actually pretty simple. Here’s our easy five-step plan that will get you going on retirement now, so you don’t have to worry about sharing the same regrets as today’s retirees.
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1. Invest 15% for Retirement
Your first step is to carve out 15% of your income just for retirement investing. Why 15%? It’s enough to allow you to reach your retirement savings goals, but not too much to keep you from enjoying your income today. Your 15% is based on your gross income and does not include any matching funds you receive through your employer’s retirement plan.
It’s okay to work your way up to that 15% goal—not everyone can make such a large budget adjustment overnight. But don’t drag it out forever. The sooner you’re investing 15%, the more confident you can be about having a secure retirement!
2. Use Tax-Advantaged Retirement Plans
Yes, we used the T-word, but don’t zone out! This is one time when talking about taxes can be exciting—or at least advantageous. Split your 15% retirement investing budget between tax-deferred retirement plans like your 401(k) and/or after-tax plans like a Roth IRA. It works like this:
- If your employer offers a 401(k) match, invest enough in your plan to receive the full match. That’s an instant 100% return on your investment!
- Invest the remainder of your 15% in a Roth IRA. You and your spouse can invest up to $5,500 a year in Roth accounts—$6,500 if you’re 50 or older. When you retire, you can use the money from your Roth tax-free!
- If your employer doesn’t offer a 401(k) match, Dave recommends you first max out your Roth, then invest in your employer’s retirement plan to meet your 15% goal.
- If your employer does offer a match with a Roth 401(k) option and the plan includes high-quality mutual fund choices, you can invest your entire 15% in your workplace Roth 401(k).
3. Spread Your Money Around
The biggest risk you can take with your retirement money is to put it all in one place. That’s why we never recommend single-stock investing. If that stock takes a hit, it may never come back—and neither will your money.
With mutual funds, however, you can invest in the largest and most recognizable brands as well as new companies you’ve never heard of but that have plenty of growth potential. Choose growth-stock mutual funds with a history of strong returns for both your 401(k) and Roth IRA investments.
You can diversify—spread your money around—even more by choosing high quality mutual funds in these four categories:
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- Aggressive Growth
- Growth and income
Investing this way lets you use the power of the stock market to build your retirement nest egg without all the risk that comes with single-stock investing.
4. Stick With It!
While mutual fund investing is less risky than investing in single stocks, it is not risk-free. The stock market will have its ups and downs, and your money will go along for the ride. As long as you leave your money where it is and keep adding to it, you'll see your nest egg grow in the long term.
Several investing studies back this up. The most compelling, a Fidelity study conducted as a five-year follow-up to the stock market meltdown of 2008-09, shows that employees who participated in their workplace retirement plan for at least 10 years had an average record-setting balance of $246,000. Their accounts have grown by an average annual rate of 15% between 2004
5. Work with an Investing Professional
You'll have plenty of questions about your retirement plan during 30 or more years of investing, so it’s important to find an investing professional.
Never settle for an investing professional who talks down to you or suggests you turn over all your investing decisions to them. This is your retirement after all—no one will care about it more than you do!
Find an investing professional in your area so you can get started today!