Four Steps to Start Saving for Retirement
Saving for retirement is often seen as an expense to put off for another day. It can be challenging to consider a distant future, especially when more immediate spending needs take priority. Unfortunately, this means many people don’t have enough saved to be financially stable and secure when they’re ready to retire. The Native American Financial Services Association (NAFSA)’s Financial Literacy Program has a Retirement 101 module to help provide better understanding and tools to begin building a robust retirement account.
One fact people often fail to consider when thinking about retirement is that any income they have earned throughout their life will either be significantly reduced or many won’t earn any income at all. So to prepare for the years when your income is reduced or depleted, developing a retirement savings plan as early as possible is vital. Below are four steps to help you start building your personal plan so you can begin saving for your future.
Step One: Set a Goal
An important factor in building a successful retirement savings plan is calculating how much money you will need during your retirement years to thrive so you can set a savings goal. Below are important questions to answer when determining a figure (don’t forget to factor in inflation!):
- How many years will you likely be retired?
- How much money will you need to have each month to live securely?
- What are your estimated monthly expenses after retirement?
Step Two: Start Saving Early
“Early” is an arbitrary time, but the fact is, the earlier you start putting money aside for retirement, the less you likely need to save every month because your money has time to grow. An easy way to start saving for retirement now is to create a budget and put a set amount aside to save each month. Once you have some money saved, you can decide how best to invest your money.
Step Three: Choose a Retirement Plan
There are many ways to invest your money effectively. One way is to choose a retirement plan that works for you. Most retirement plans are composed of a preset choice of investment options, such as mutual funds, which are often made up of stocks and bonds. There are several types of plans, all of which are designed to help you accomplish your long-term savings goals.
- 401(k) & 403(b) – These plans are offered by many employers and allow participants to make pre-tax contributions, have tax-deferred growth, and allow for portability. Every employer-sponsored plan is different, so research the rules of the options available to you.
- Individual Retirement Account (IRA) – If your company does not offer a plan, or if you are self-employed, you can also start your own Individual Retirement Account, or IRA, or to maximize your retirement savings. Similar to employer-sponsored plans, there are rules for when you take out money and how much you can contribute to an IRA.
Step Four: Automate Your Savings
This last step involves putting your personal retirement plan into action. An easy way to commit to the plan is to set up automated or schedule deposits into your retirement account or your retirement plan. Automated deposits are often an option when you are signing up for an employer-sponsored plan. If you have a retirement account, you can work with your financial services institution to set up a part of your paycheck to be deposited at a rate that works for you.
These four steps will get you started on your retirement savings journey. As a reminder, your retirement investments need to be continually managed over time to ensure that you are maintaining the risk and return levels that you need for a secure retirement. Review your retirement investments on an annual basis and put in place the most effective combination of investments given where you are in your life.