Some early financial behaviors that may promote a comfortable future.
You know
you should start saving for retirement before you turn 40. What can you start doing
today to make that effort more productive, to improve your chances of ending up
with more retirement money, rather than less?
Structure
your budget with the future in mind. Live within your means and assign a portion of
what you earn to retirement savings. How much? Well, any percentage is better
than nothing – but, ideally, you pour 10% or more of what you earn into your
retirement fund. If that seems excessive, consider this: you are at risk of
living 25-30% of your lifetime with no paycheck except for Social Security.
(That is, assuming Social Security is still around when you retire.)
Saving and investing 10-15% of what you
earn for retirement can really make an impact over time. For example, say you
set aside $4,000 for retirement in your thirtieth year, in an investment
account that earns a consistent (albeit hypothetical) 6% a year. Even if you
never made a contribution to that retirement account again, that $4,000 would
grow to $30,744 by age 65. If you supplant that initial $4,000 with monthly
contributions of $400, that retirement fund mushrooms to $565,631 at 65.1
Avoid
cashing out workplace retirement plan accounts. Learn from the terrible
retirement saving mistake too many baby boomers and Gen Xers have made. It may
be tempting to just take the cash when you leave a job, especially when the
account balance is small. Resist the temptation. One recent study (conducted by
behavioral finance analytics firm Boston
Research Technologies) found that 53% of baby boomers who had drained a
workplace retirement plan account regretted their decision. So did 46% of the Gen
Xers who had cashed out.2
Instead, arrange a rollover of that money
to an IRA, or to your new employer’s retirement plan if that employer allows.
That way, the money can stay invested and retain the opportunity for growth. If
the money loses that opportunity, you will pay an opportunity cost when it
comes to retirement savings. As an example, say you cash out a $5,000 balance
in a retirement plan when you are 25. If that $5,000 stays invested and yields
5% interest a year, it becomes $35,200 some 40 years later. So today’s $5,000
retirement account drawdown could amount to robbing yourself of $35,000 (or
more) for retirement.3
Save enough
to get a match. Some employers will match your retirement contributions to some
degree. You may have to work at least 2-3 years for an employer for this to
apply, but the match may be offered to you sooner than that. The match is often
50 cents for every dollar the employee puts into the account, up to 6% of his
or her salary. With the exception of an inheritance, an employer match is the
closest thing to free money you will ever see as you save for the future. That
is why you should strive to save at a level to get it, if at all possible.4
Saving enough to get the match in your
workplace retirement plan may make your overall retirement savings effort a bit
easier. Say your goal is to save 10% of your income for retirement. If the
employer match is 50 cents to the dollar and you direct 6% of your income into
that savings plan, your employer contributes the equivalent of 3% of your
income. You are almost to that 10% goal right there.4
Think about
going Roth. The
younger you are, the more attractive Roth retirement accounts (such as Roth
IRAs) may look. The downside of a Roth account? Contributions are not
tax-deductible. On the other hand, there is plenty of upside. You get
tax-deferred growth of the invested assets, you
may withdraw account contributions tax-free,
and you get to withdraw account earnings tax-free once
you are 59½ or older and have owned the account for at least five years. Having
a tax-free retirement fund is pretty nice.4
To have a Roth IRA in 2016, your modified adjusted gross income must be
less than $132,000 (single taxpayer) or $194,000 (married and filing taxes
jointly).4
Set it
& forget it. Saving consistently becomes easier when you have an automated direct
deposit or salary deferral arrangement set up for you. You can gradually
increase the monthly amount that goes into your accounts with time, as you earn
more.
Invest for
growth. Much
wealth has been built through long-term investment in equities. Wall Street has
good years and bad years, but the good years have outnumbered the bad. Early
investment in equities may assist your retirement savings effort more than any
other factor, except time.
Time is of
the essence. Start saving and investing for retirement today, and you may find
yourself way ahead of your peers financially by the time you reach 40 or 50.
Taylor McClish may be reached at 503.239.3060 or taylor.mcclish@cunamutual.com.
This material was prepared by MarketingPro,
Inc., and does not necessarily represent the views of the presenting
party, nor their affiliates. This information has been derived from
sources believed to be accurate. Please note - investing involves risk,
and past performance is no guarantee of future results. The publisher
is not engaged in rendering legal, accounting or other professional
services. If assistance is needed, the reader is advised to engage the
services of a competent professional. This information should not be
construed as investment, tax or legal advice and may not be relied on
for the purpose of avoiding any Federal tax penalty. This is neither a
solicitation nor recommendation to purchase or sell any investment or
insurance product or service, and should not be relied upon as such. All
indices are unmanaged and are not illustrative of any particular
investment.
Securities sold, advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC,
a registered broker/dealer and investment advisor. CBSI is under
contract with the financial institution to make securities available to
members. Not NCUA/NCUSIF/FDIC insured, May Lose Value, No Financial
Institution Guarantee. Not a deposit of any financial institution.
Citations.
1 - investor.gov/tools/calculators/compound-interest-calculator
[7/7/16]
2 - marketwatch.com/story/millennials-can-save-more-for-retirement-by-learning-from-baby-boomers-mistakes-2016-06-30
[6/30/16]
3 - thefiscaltimes.com/2015/11/20/7-Ways-Millennials-Are-Getting-Retirement-Saving-Wrong
[11/20/15]
4 - kiplinger.com/article/retirement/T001-C006-S001-retire-rich-saving-for-retirement-in-your-20s-30s.html
[2/4/16]
07142016-WR-1706