Young clients ask us all the time “Am I doing enough?” Our answer is often the same. “If you’re asking that question, you’re already way ahead of a lot of people. Let’s talk.” But many of you in your 20s and 30s haven’t done anything for retirement yet or have done the bare minimum.
Which is, of course, perfectly understandable. There may not be another time in your life when you have so many things competing for your dollars and your attention. You might be concentrating on a new career – and old student loan debt. Deciding whether to rent an apartment or buy a starter home. Thinking about getting married or starting a family. With so much going on in the here and now, it’s hard to make time to take care of your future.
But here’s the hard realization. If you don’t do it, no one else will. And every time you decide to do it tomorrow, you’re taking a little more money out of your retirement fund. It may not seem like a huge deal to wait a few years to start filling that fund, but someone who waits until their thirties to invest in retirement will likely end up with an account that’s half the size of someone who started in their 20s. That’s a huge deal.
The good news is, it’s easier than you think. So let’s take a look at four ways to help you make sure those pockets get filled.
Every day can’t be sunny and bright. But with a little bit of preparation, you can be ready when the rain comes. How much should you save? $1,000 is a great start. That’s enough to cover a few pop-up bills like a car repair or a busted dishwasher. But to stay safe and dry in a larger financial storm, like a temporary job loss or unexpected medical bills, it’s good to have at least three months living expenses stashed away. Now, don’t start hyperventilating. You don’t have to save it all at once. And you’ll get there sooner than you think if you learn two of the most important words in saving and investing: automatic transfer. Open a separate account and have a set amount directly deposited each month. It takes the planning and willpower out of it and you won’t have to remember a thing.
A 401(k) is just a retirement account offered by your employer that’s funded by pre-tax payroll deductions and employer contributions. If you work for an education institution or a non-profit you might have a similar account called a 403(b). One of the biggest perks to these accounts is something called employer matching, which means if you contribute a certain amount, your employer will as well. You can look at employer matching in one of two ways: free money or part of your pay. Either way you’d be foolish to turn it down. How much should you contribute? The rule of thumb is 12 to 15 percent of your salary, but if that seems out of reach, try to contribute at least enough to get the full employer match, then make a plan to bump it up a percentage point or two each year.
For younger people in lower tax brackets, or those with 401(k) plans that have high costs or no employer matching, a Roth IRA might be the way to go. One big difference between a Roth IRA and a 401(k): the money you contribute has already been taxed so you won’t pay taxes on it when you retire. There are a lot of considerations when choosing between a Roth IRA or a 401(k) and for some it might be a good idea to have both. If you’re unsure, let a financial professional run the numbers for you.
Nobody wants to think about their own death. Especially when you have more decades ahead of you than behind. But life insurance plays an important role in your financial security. And you don’t have to be married with four kids to start thinking about it. If anyone you know would be put in a bind without your income (including your student loan co-signers) you’re a candidate. If you are married, you and your spouse should consider getting life insurance to help with shared expenses. And if you’re thinking of having kids, it can be less expensive to grab a policy before the little tykes enter the picture. Life insurance can be temporary or permanent, but for people just starting down the career path, temporary term life policies are attractive because their premiums can be up to ten times lower and still offer up to 30 years of coverage.
Congratulations. Since you’ve read this far, you can count yourself among those who are doing something about retirement. Now, if you haven’t already, it’s time to start really doing something about it. No one has ever looked back when they were ready to call it quits on the daily grind and wished they’d held off a little longer on setting something aside for tomorrow. So live within your means, enjoy life’s adventures, and do what you can to follow these four pillars. You will thank yourself in the future.
For more than three decades, Cobblestone has been a trusted partner to individuals, families, and institutions. In the same way distinctive cobblestones are thoughtfully assembled to withstand any conditions, we provide the breadth of services, depth of expertise, and team approach required for resilient financial stewardship.
DISCLOSURE: Cobblestone does not provide tax or accounting advice; clients should also consult with licensed professionals in that field.