What's standing between you and a comfortable retirement? Whether retirement is getting close or way in the future, these three steps can help you achieve the retirement you deserve after your hard work:
Step 1: Set goals today and create your plan
Let's be honest, setting long-term financial goals can be hard. It's hard to have a clear vision of some far off event such as retirement. If this resonates with you, you're normal. Most of us didn't grow up learning about financial planning or how to balance spending money to enjoy life today while still saving for long-term goals.
Most people don't set retirement savings goals for three reasons:
- Unlike, say, a house or car, retirement is a future event that is hard to save for and visualize.
- We don't know how much we will need, so we don't know how much to save today.
- We don't have a handle on our cash flow, so we don't know how much we can save.
Because we lack clarity about these aspects, we often take no action at all. The better move is to start building good financial habits:
- Set a goal. Know how much you need to save. Not sure where to start? The rule of thumb is to save at least 10-12x your current income, but that rule of thumb is just a starting point, and for many people that number may be too low. A financial planner can help you find a more realistic number.
- Pay yourself first. Treat your future self as your most important expense, and pay yourself first. Put something towards retirement every time you receive a paycheck, and then pay your other bills. Even if you can’t put away a lot initially, this is an excellent financial habit to get into early in your life (or any time).
- Build a plan. Keep it simple. Focus on what you can do in the next 6-12 months. The key is to just get started — you can always adjust your plan later.
Step 2: Start investing early to reap the full benefits of compound interest
Albert Einstein is reputed to have said, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn't … pays it.”
Another way to put it: time is an investor's greatest tool. It allows your money to grow, and in turn, earn even more.
If you haven't started investing for retirement, start now, even if you have to start small. Invest 1% of your paycheck this year. Next year bump that to 2%, and raise it by another percentage point every year.
Here's what starting early means. Darwin's Finance, a leading authority, crunched the numbers and found that a 25-year-old who saves $1,000 every month until age 35 will have more money for retirement than a 35-year-old who saves $1,000 each month until age 65.
The moral of the story? Not everyone can save $1,000 a month, especially at 25, but you should still start investing today. Even if you are only able to save a small amount because of other priorities (debt, college, new home, life!), starting early gives our money more time to grow and work for us.
Step 3: Consult with a CFP® Professional
How do we simultaneously save for retirement, a new home, and our children's college tuition, especially if we also have to pay down debt? These are important decisions that will have lifelong effects, and the closer you are to retirement the more important it is to get them right. A CFP® professional, whose expertise includes investing, taxes, estate planning and other financial topics, can help put our financial life in balance for greater clarity and confidence, and significantly reduce stress.
A CFP® Professional, like those at Facet, can help you establish a plan, avoid excessive fees, and manage the greatest risks in retirement:
- Market performance
- Inflation
- Longevity
- Health
- Tax and policy changes
- Unexpected events
- Inappropriate allocations.
It's important to recognize the urgency of investing even if retirement might be several decades away. At Facet, we emphasize actions that can be taken each year to prepare for retirement, such as maxing out your Roth IRA or increasing your 401(k) contribution. Specific, measurable and achievable annual goals help break down long-term planning into more manageable pieces.
Keep it simple, make it balanced, and give it purpose. Start with a small step. Balance your priorities (everything in moderation). Focus on what matters most to you. And, above all, get help from an expert.
