By Cameron Huddleston for GOBankingRates.com
When you’re in your 30s, retirement planning is probably not at the forefront of your mind. After all, it’s at least 30 years away and you likely have more immediate concerns, such as paying off student loans, saving for a house or starting a family.
However, the earlier you start planning your retirement, the better your chances of being able to retire when and how you want. Regardless of your current situation, you should be thinking about your future now and taking steps to secure it. Here’s how:
Step 1: Condition Yourself to Save
“No one else is going to save for you,” said Michael Hardy, a certified financial planner with Mollot Hardy in Amherst, N.Y. Fewer than one in five employees working in the private sector is covered by pension plans, according to the Bureau of Labor Statistics. And Social Security trust fund reserves are expected to be depleted by 2034, according to the latest Social Security trustees report. If Congress doesn’t take any action, the tax revenue that funds the program will only be able to pay just 75 percent of one’s benefits. Consequently, you must establish the discipline to set aside money for the future, Hardy said.
The easiest way to do this is by automating savings. Participate in your workplace retirement savings plan and have your contributions automatically deducted from your paycheck. If you’re self-employed or your employer doesn’t offer a retirement plan, set up your own – such as a Simplified Employee Pension (SEP) plan or 401(k) – through an investment firm with low fees, such as Fidelity or Charles Schwab.
Even if you can’t set aside much, the key is to start saving sooner rather than later to give your retirement account time to grow. “Small amounts of money over a long period of time with a good rate of return will equal a lot of money,” Hardy said.
Step 2: Set Aside Enough
Ideally, you should be saving at least 10 percent of your income per year for retirement, Hardy said. By setting aside this much starting in your 30s, you should have enough saved by the time you reach retirement age in your 60s to have a comfortable standard of living, he said.
If there’s not room in your budget to set aside 10 percent of your paycheck, start lower. But make sure you increase the amount you contribute each year as your income rises, Hardy said.
Step 3: Choose Wisely
To make the most of the time you have to accumulate retirement savings, you need the right mix of investments for a solid rate of return. The average investor in equity funds earned about 3.8 percent annually over the past 30 years while the Standard Poor’s 500 index earned 11 percent annually during that period, according to Dalbar’s annual report of investor returns.
Vincent Wagner, a certified financial planner and president of Guide Tower Financial Planning in New York, recommends buying exchange-traded funds, which track an index such as the Standard Poor 500 index. He said ETFs are a better option than mutual funds because a majority of funds don’t perform as well as the market. Plus, mutual fund fees are higher than ETF fees, which means less money in your account at retirement. For example, if you have a 401(k) balance of $30,000 and save $5,000 per year for 30 years with a 6 percent annual rate of return, you’ll have $89,500 less if you pay 2 percent in fees per year versus 1 percent, Wagner said.
If your workplace retirement plan doesn’t offer exchange-traded funds as an investment option, talk to your plan administrator about adding them to the mix. Otherwise, another option to consider is a target-date fund, which automatically adjusts allocation of equities and fixed-income assets to a more conservative mix as you approach retirement.
Step 4: Don’t Time the Market
Often, investors’ biggest mistake is letting emotions rule their buying and selling decisions. Don’t panic and take your money out when the markets fall, financial advisors warn. You want to buy low and sell high. When you sell your stocks or mutual funds after a market drop, you’re doing the opposite. It’s best to chose a particular investment strategy, taking into account your risk tolerance, and stick with it. Because you have decades before retirement, you have time to ride out the market’s highs and lows.
Step 5: Pay Off Debt
Debt can get in the way of saving for retirement. The higher your debt levels and the longer it takes you to pay it off, the less money you’ll have to set aside for retirement. That’s why it’s important to pay down what you owe as quickly as possible and avoid accumulating more debt.
Consider this example: If you had a $5,000 balance on a credit card with an interest rate of 15 percent and made a minimum monthly payment of 2 percent of your balance, it would take more than 20 years to pay it off. Also, that $5,000 debt would cost you nearly $12,000 by the time you paid it off. If you invested $5,000 a year for 20 years and earned an annual 7 percent rate of return, you’d have nearly $220,000.
Step 6: Open a Roth IRA
If you’re contributing the maximum to your workplace retirement plan and want to save more (or you don’t have a plan through work), Wagner recommends opening a Roth IRA. If you’re married and your spouse doesn’t work, you still can contribute to a spousal IRA on his or her behalf up to a maximum of $5,500.
Roth IRAs are appealing for 30-somethings because they offer flexibility, Wagner said. Unlike with other retirement accounts, you can withdraw contributions to a Roth tax-free and penalty-free at any time, which can be helpful if an emergency arises. You also can withdraw up to $10,000 in earnings tax-free and penalty-free to buy your first home or to pay for higher education expenses. All withdrawals after age 59 ½ are tax-free. You paid tax on that income when you first contributed.
Step 7: Learn to Ask for a Raise
Less than half of those surveyed by online salary database Payscale.com said they have ever asked for a raise in their current field. If you’re not negotiating your salary, you’re not only short-changing your income but also your retirement savings.
Wagner offers this example: Say you’re age 35 and earn $50,000 a year. If you settle for a 3 percent annual cost-of-living increase rather than negotiating a 5 percent annual raise, you’ll have lost nearly $950,000 in potential earnings by age 65.
He recommends using sites such as Payscale.com and Glassdoor.com to research your value and learn the art of negotiating your pay. Then you can funnel any raises or bonuses you get into your retirement account.
Step 8: Have a Vision as a Couple
If you’re married or in a long-term relationship, figure out your retirement goals as a couple, Hardy said. That means having discussions to determine at what age both of you want to retire, what sort of lifestyle you want in retirement and where you want to live. If you’re not on the same page, you won’t be able to work together to reach your goals.
Step 9: Maximize Your Employee Benefits
Retirement planning doesn’t involve just saving money. It also requires making sure you have safety nets in place. To do this, Wagner said you need to maximize your employer benefits such as disability insurance, life insurance and health insurance. If you’re not offered enough coverage through work,consider buying policies on your own.
“These insurance options are important as risk management in case of a life event that will completely derail your family’s way of life,” Wagner said.
Step 10: Get Professional Help
When it comes to planning for your retirement, you don’t have to go it alone. A financial planner can help you develop a comprehensive plan to reach your goals and hold you accountable to those goals, Hardy said.
You can search for a fee-only financial planner (which means they don’t work on commission) through the National Association of Personal Financial Advisors site. Or you can find hourly-based, fee-only planners through the Garrett Planning Network. Also take advantage of any professional investment advice services that might be available through your workplace retirement plan.