Plan to Retire Rich: Smart Steps at Ages 22-35
Time is on your side. Small, steady contributions will grow into a sizable stas
At this stage of your life, your most valuable asset isn’t youthful vigor or a full head of hair. It’s time. Because you’re decades from retirement, contributions to a 401(k) or other retirement plan will have years to compound and grow..
Current age and expected retirement age create the initial groundwork of an effective retirement strategy. Firstly, the longer the time between today and retirement, the higher the level of risk that one’s portfolio can withstand. If you’re young and have 30+ years until retirement, you should have the majority of your assets in riskier securities like stocks. Though there will be volatility, over long time periods stocks outperform other securities, like bonds.Most importantly, start planning for retirement as soon as you can. You might not think a few bucks here or there in your 20’s mean much, but the power of compounding will make that worth much more by the time you need it. (The future may seem far off, but now is the time to plan for it
Even a modest contribution now will pack a much greater wallop than a significantly larger contribution when you’re in your forties and fifties
If you start socking away $250 a month in a retirement account from the moment you land your first full-time job at age 22, within ten years you’ll have a stash of more than $37,000, assuming your investments grow 8% a year. In 20 years, you’ll have more than $122,000, and by the time you reach age 67, your nest egg will be worth $1.2 million.
Stuart Ritter, a certified financial planner for T. Rowe Price, recommends investing 15% of your salary toward retirement. That may seem like an unreachable goal for young people with other demands on their paycheck. If you’re pulling in $30,000 a year, for example, that’s $375 a month. But with tax breaks associated with employer-sponsored retirement plans, plus a possible employer match, you can reduce your actual out-of-pocket contribution. Even a smaller contribution will give you a serious head start on saving, so you’ll have a bigger stash that can grow for decades — plus more wiggle room to deal with the competing demands on your paycheck later on.
Enroll in the 401(k). Most major companies that offer 401(k) plans match a percentage of your contributions. Typically, these matches range from 25% to 100% of your contribution, up to 6% of your salary. Even if the match is at the low end, that’s an immediate 25% return on your investment, says Ted Sarenski, a certified public accountant in Syracuse, N.Y. “You’re not going to get that kind of return anywhere else.”
In addition, the money that you contribute to your 401(k) is excluded from taxable income. Once you take the tax break into account, a 6% contribution “only feels like 4%,” says Sheryl Garrett, president of Garrett Planning Network.
Life insurance is also an important part of the retirement planning process. Having both a proper estate plan and life insurance coverage ensures that your assets are distributed in a manner of your choosing and that your loved ones will not experience financial hardship following your death. A carefully outlined will also aids in avoiding an expensive and often lengthy probate process. Though estate planning should be part of your retirement planning, they each require the expertise of different experts in their respective fields.
Tax planning is also an important part of the estate planning process. If a parent wishes to leave assets to either their family members or even to a charity, the tax implications of either gifting the benefits or passing them through the estate process must be compared. A common retirement plan investment approach is based on producing returns which meet yearly inflation-adjusted living expenses while preserving the value of the portfolio; the portfolio is then transferred to the beneficiaries of the deceased. You should consult a tax advisor to determine the correct plan for the individual.
Pay off student loans — in good time. Don’t pay off federal student loans more quickly than necessary, Ritter says. The interest rate — between 3.4% and 6.8% for loans issued after 2006 — is fixed and relatively low compared with the rates many borrowers get on private student loans, and up to $2,500 of the interest is tax-deductible.
Resist cashing out a 401(k). When you leave a job, you have several options for your 401(k) plan. You can leave it with your former employer, roll it into an IRA, roll it into your new employer’s plan (if your employer permits such rollovers) or ask your former employer to cut you a check.
You may be tempted to choose the last option, but in most cases, that’s a bad idea. Your employer will withhold 20% of the amount withdrawn to cover income taxes. And because you’re under 55, you’ll also have to pay a 10% early-withdrawal penalty on the entire amount. Plus, you’re jettisoning any growth you’ve earned, which sends you back to square one when you start saving again. Workers who cash out their 401(k) plans reduce their retirement income by up to 67%, according to an analysis by the Employee Benefit Research Institut.