You just started in your career, yet the word "retirement" is already in your financial vocabulary. And that's a good thing. Early in your working years, a little effort to start saving for retirement can go a long way.
We've got some important points to consider as you begin to save for retirement.
Time is a powerful ally in retirement planning.
If you're early in your career, you may think you're better off waiting until the peak of your earning power to save. This isn't true.
In fact, if you have access to a 401(k) or the Thrift Savings Plan, or TSP, you could be missing out on matching contributions by not starting today. Learn more about how a 401(k) or TSP can benefit your retirement journey.
Also, the earlier you begin to save, the better positioned you are to take advantage of the principle of compounding interest, a powerful tool when saving for retirement.
Here's how it works: As you make money, those gains also make money. It snowballs from there, so time is the secret to letting that compound interest grow from a snowball into a snowman.
As with anything, gains or profits are never guaranteed. But investing your money is your best bet when it comes to saving for retirement. Learn more about the basics of investing for your future.
Saving for your retirement is up to you.
In the past, many employers offered their workers a pension. Today, pensions are the exception rather than the rule, and employees are responsible for planning their own retirement.
It's up to you to take ownership of your future. The key is getting into the habit of saving for retirement early in your career. Start saving before marriage, homeownership, children, college savings and other responsibilities make it harder to commit resources.
Then, when life gets in the way and you face a setback in the future, you at least have what you've saved in the past.
Don't wait to be debt-free before saving for retirement.
You're smart to pay off high-interest credit cards and other expensive debt as quickly as possible. But it's not realistic to think you can eliminate all your debt before socking money away for retirement.
Don't wait until everything is perfect to start. If you wait until you have every debt paid off, you may never get started.
Rather than trying to pay off debt before saving for retirement, prioritize these three steps:
- Analyze your spending to be sure you're not adding to your debt. You want to be sure you're spending less than you earn to avoid digging yourself into a financial hole.
- Make a debt repayment plan that will lead to being debt-free in the future.
- Save at least $1,000 in an emergency fund.
For more help in paying off debt, we have a dedicated page for just that.
Planning for retirement is your chance to plan for your dreams.
There's a good chance your dream retirement looks different from your neighbor's dream retirement. Maybe you want to travel or spend time visiting family. Maybe you want to stay close to home but have plenty of money to go out to dinner or the theater. Maybe you want to buy a lake house and live out your golden years with a great view and a good book.
The point is, retirement is an important time in your life, and if you plan accordingly, you can help make your own dreams come true.
Because retirement dreams are personal, it's hard for financial experts to throw out a figure as "The Official Amount You Need to Save for Retirement." That means the planning is in your hands. Start by thinking about what you want. Online calculators can help you determine how much you need in retirement and how much to save each month to get there.
Remember that over the years, things can change, including your retirement vision. As your ambitions evolve, your savings strategy should, too. Also, your investment performance might underperform your planning. You'd then need to save more money for retirement.
Set some time aside each year, or with major life events, to review your plan and make course corrections.
Save while you can.
Generally speaking, the money you have when you enter retirement is the amount of money you'll have for the rest of your life. Sure, you could experience market gains or get a part-time job, but now is your chance to save.
You can get a loan for a car, you can get a loan for your children's education, and you can get a mortgage for a house. But here's the important thing to remember: No one will give you a loan for retirement. Save now while you're able.
We don't know what the future holds. You might have a setback due to the loss of a job or a health condition that causes you to stop working earlier than you'd like. I've never heard anyone say they saved too much for retirement, but I've heard many people say they wish they'd started earlier.
Know your options for retirement saving.
While there are many options you might have available to you, here are three common methods of saving for retirement.
- Employer-sponsored Retirement Plans
These plans, such as 401(k)s and 403(b)s, are popular. A 401(k) is offered to employees of for-profit companies, while a 403(b) is offered by nonprofits and government agencies. Each usually comes in traditional and Roth IRA versions.
Regardless of whether you work for a for-profit or nonprofit, if your employer offers you a matching contribution, sign up.
Let's say your employer offers a 5% match. That means if you contribute 5% of your paycheck, they'll add another 5% for free. Once you meet the vesting requirements of your particular plan, the money is yours to keep. We look at this as free money, and I try to never turn down free money. - Individual retirement accounts, or IRAs
An IRA helps you save for retirement by offering tax advantages. Whether you choose a traditional IRA or Roth IRA, you can select from a variety of options, including mutual funds, stocks, bonds and exchange-traded funds, or ETFs. You can also roll over an old 401(k) or another institution's IRA if it fits your financial needs. Check out this article to learn more about Roth versus traditional IRAs. - TSP
This is the military's version of a 401(k). You can sign up to contribute a portion of each paycheck to this tax-advantaged account on myPay. If you're under the Blended Retirement System, you're eligible for automatic and matching contributions, based on the schedule included in A Guide to the Uniformed Services Blended Retirement SystemOpens in new window. See note 1 Just like employer-sponsored matching programs, you can think of this as free money.
Make saving for retirement part of your spending plan.
Now that you've thought about your dream retirement and you have an idea of how you want to live after your career ends, it's time to bring it all together.
Start with a budget, or spending plan. A spending plan helps you spend less than you earn. It's a tool that helps you prioritize your financial goals. Your goals likely include things like paying down debt, saving for an emergency fund and saving for retirement.
A good initial retirement goal is to save at least 10% of your paycheck. That may seem like a lot, especially if you're just starting out or have debt to pay down. That's why USAA believes in the retirement mantra: Start early, start small, stay committed. Even if you start small, starting early lets you take advantage of time.