By Allyn Hughes, CFP®, ChFC®, CLU®, CAP®
In my last post, I reviewed some of the issues that have stopped baby boomers and millennials from saving enough for retirement in 401K or other employer provided retirement plans.
When people ask me about how to save for retirement, here are some of the suggestions that I give them.
- If you are young, think about creating a savings goal for your retirement plan accounts. Work with a financial advisor or find an online program to suggest an amount of money that you might need to accumulate in order to provide the annual income in retirement that would make you feel comfortable. To use one of these retirement income tools, you will need an idea of how much income in today’s dollars you will want to have, the number of years until you retire, the amount of retirement assets you currently have, how much you are saving toward retirement every year and an idea of how your current and expected retirement savings are being invested – or an expected rate of return for your retirement investment portfolio.
- Always participate in whatever retirement plan that is offered by your employer. Sign up for this retirement plan as soon as you are eligible to—even if your contributions to the plan are not initially matched by your employer. When your employer does start to match a portion of your retirement savings, save at least enough to earn the complete “match” made by your employer. Contribute at that level for a couple months and then see if your paycheck is large enough to continue to live on. If you are able to pay your bills, then increase your retirement plan contribution rate 1% every three months until you either max out your contribution rate or you find it difficult to live on your paycheck. Remember the basic philosophy here is “you don’t miss what you don’t have.”
- If you get a bonus that is not eligible to be included in the retirement plan try to save a portion of this amount in either a Roth (if eligible) or an IRA (if eligible).
- Invest your retirement plan assets relatively aggressively. Either invest in a low cost Target Date Fund that is five years later than the year you expect to retire, or use the asset allocation (U.S. and International stocks, U.S. and international bonds and cash) of a target date mutual fund that is five years later than when you plan to retire.
- Focus on using the lowest cost investments options available in your 401K plan.
- Never borrow money from your retirement account(s). You have one opportunity to save enough to support yourself in retirement. Often, if you can borrow from a retirement plan, you cannot make new contributions to the plan until the loan is paid off. You are also repaying yourself back for the loan. Almost always it is better to borrow from other sources to finance education or housing costs. Or, you can choose to defer those costs by waiting for a year or so to make this purchase, that is often preferable to using retirement assets for purposes other than retirement.
- If you get access to any other employer provided retirement or savings plans, including restricted stock plans, deferred comp plans or small business purchase plans, then your first consideration is the health of the business and the attractiveness of your employer as an investment. If you are convinced that your employer is a profitable business that has good long-term prospects, then consider participating in these plans.
~ Brooks, Hughes & Jones Wealth Advisors — Gig Harbor, Washington