Ah, retirement. I can just picture myself sitting in a rocking chair on a porch – gray-haired in some sort of muumuu frock and orthopedic shoes – while my husband of fifty plus years leans over and says wistfully (through sparkly white dentures), “Don’t you wish we would’ve saved for retirement earlier? It would’ve been so much nicer to retire at Millionaire Estates instead of Countryside Acres.”
WHAT A NIGHTMARE! Not the retirement part, the gray hair part! Geriatric beauty and fashion aside, it’s something that makes me think about how and when I should start saving money for my twilight years.
If only it were all as easy as the game of Life: all you had to do was spin the dial, collect meaningless cardboard tiles, and travel around in your little plastic Jeep with a beautiful family of pastel pegs organized neatly inside. In retrospect, you can play Russian roulette with your savings, amass money and investments that are worthless, and… well, drive around in a plastic Jeep with your pegs. As it is, we may be too old for board games, but not too young to start saving for the future.
You’d be surprised to know I’m the offspring of a financially fit woman who manages the 401(k) plan for all employees of her company, and have a father who pays off every single cent of his credit card debt each month. I might like to hit the mall a little too much and have an addiction to Target (it’s a work in progress), but I do know a thing or two about finance and retirement. Let’s get you thinking about the R-word:
“I Know Nothing About Retirement. What Are My Options?”
At my age, I know better than to rely on Social Security to kick in. My plan is to set aside 10-15 percent annually and maximize my rate of return. If you’re employed at a larger company, learn as much as you can about contribution matching (hey, it’s like free money!).
There are many retirement options, but let’s go over the most well-known. If you’ve heard a lot about 401(k) and IRA accounts but are unsure of the difference, here’s a quick rundown to help you decide what works best for you:
- 401(k) - It’s set up through your employer, and contributions are deducted from your paycheck prior to taxes. Your nest egg will grow tax-free until you tap into your savings. Consider what your money is being invested in through your company (think of Enron) and understand that consequences occur if you borrow money from your 401(k) before age 59.5. The contribution limit for the fiscal year 2011 is $16,500.
- Individual Retirement Account (IRA) – This is traditionally set up through a bank or financial planner and unrelated to your employer. Contribution matching is not available, but you’re allowed more investment choices (stocks, bonds, mutual funds, CDs). It’s removed from pre-tax income and develops without tax deductions until you withdraw. The contribution limit for the fiscal year 2011 is $5,000 (if it were higher, people might move more money into their IRAs to reduce their tax bill – Uncle Sam wouldn’t appreciate it).
“But I’m Terrible at Saving. How Do I Start?”
Once upon a time (or maybe a few weeks ago), I’d say I was awful at it too. The moment my checking account filled up with my paycheck, I’d be likely to suck the life out of my earnings like a clothes-hungry vampire.
Cut your expenses. It’s obvious, but the overall goal is to spend less than you earn. If you’re buying Gucci but living on a Jacqueline Smith budget, then walk away from the couture! Even though you may have a credit card and think, “Well of course I’ll pay this later!” it becomes harder as the debt accumulates. Add this one up Einsteins: Substantial Debt + Poor Credit Score = Bad Retirement Outlook.
Something else to consider is evaluating your regular expenses to see how much you’re really using them. If you pay $50 a month for your gym membership but have only stepped inside to get your ID picture taken, then it’s only draining your wallet (and highly doubtful it’s doing any justice on your waistline).
Our brains are often hypnotized into the psychedelic world of mindless spending. I suffer from this setback when I start wandering aimlessly through the mall: buying nonsense just out of boredom or purchasing items to keep up with peers. I bet I could save at least $100 per month if I started listening to the frugal angel on my shoulder instead of the little materialistic devil. It might not seem like much now, but it’s $1,200 annually and in 42 years (when I’m 65 – YIKES) it adds up to over $50,000. Even if the savings don’t go towards your retirement, it’s always shrewd to have an emergency fund for the unknowns in life.
Always track your spending. The more you nix from your variable costs now, the less often you’ll find yourself scraping from the bottom of the cash barrel. The money you may have been spending on items of frivolity (note to self: stay away from the makeup counter) can now enjoy a nice new home in a savings account or emergency fund instead of quickly being recycled through a cash drawer.
Set target goals. The little scenario I dreamed of earlier in which my imaginary spouse was regretfully considering our retirement blunders happens to be a common occurrence. Consider the following factors to have a clear idea of what you’re saving for: time frame you plan to retire (I’m eligible in 2055, so I’ll probably be living with a family of robots in a spaceship by then), how many years you’ll need the income you’ve saved, and the rate of return expected on your investments.
Think about it this way: would you rather get hit with a large basketball or a small ping-pong ball? The latter hurts much less, as does saving in little chunks at a time. You can play catch up later in life by saving gigantic (basketball-sized) sums, or put away a little at a time (ping-pong ball-sized) and attain the same amount without draining your funds all at once.
So, where are you going to retire, Countryside Acres or Millionaire Estates? It’s never too early to start playing the game of Life strategically and frugally. Do you have any financial or retirement planning tips for young professionals? We’d love to hear them!
Stephanie Koske is a writer for Quicken Loans, an amazing place to work. Find out more about being a part of our team at Quicken Loans and learn how we Amaze our clients.