Learn the 10 secrets to successfully save for retirement
Saving for retirement can be surprisingly easy if you make a few savvy decisions along the way — and avoid some major pitfalls.
But first you'll need to accept responsibility for your own retirement. The era of corporate pensions is over, and Social Security will only guarantee you live an impoverished old age.
You — and you alone — must build enough wealth to support yourself after you stop working. The earlier you start — and the smarter you are about saving — the better off you'll be in your golden years.
Now let's look at the 10 secrets that will help you reach your goal.
Secret 1. Don't get discouraged by how much you need.
Ideally you'll retire with enough savings to replace at least 60%, and preferably 80%, of your pre-retirement income.
Our retirement calculator allows you to see how much you'll need to hit that mark.
It's likely going to be a shocking number.
Let's say, for example, you earn $65,000 per year and want to retire 30 years from now and replace 70% of your income for 25 years.
The retirement calculator says you'll need a whopping $2 million, a daunting goal for anyone to reach.
But don't get discouraged and quit.
When factoring in Social Security income, most of us can have a reasonable retirement and at least get by if we reach our 50s or 60s with $500,000 in savings.
Yes, that's still more than most people have accumulated.
Only 12% of workers reported retirement savings of $250,000 or more in the 2013 Retirement Confidence Survey from the Employee Benefit Research Institute.
Still, with a little effort, half a million bucks is still a meaningful and attainable goal.
How much Americans have saved for retirement
Source: Employee Benefit Research Institute; Minus value of primary residence or defined benefit plans.
|Less than $1,000||20%||27%||29%||30%||28%|
Secret 2. Maximize your employer's 401(k) match.
If you have an employer that matches 401(k) contributions, your first priority should be to get that entire match.
It's free money.
Even if your employer's plan has high fees, you should still contribute enough to get the maximum match.
Let's say you earn $50,000 per year and your employer will match 50 cents of every dollar you contribute up to 5% of your salary. That means if you save $2,500, your employer will contribute $1,250.
Over the years, this can add tens of thousands of dollars to your retirement fund and even more when you factor in dividends and capital gains.
Our 7 rules for a successful 401(k) can help you make all of the right decisions about your retirement plan.
Secret 3. Take advantage of a Roth IRA.
Whether or not you have a 401(k) through work, you should take advantage of a Roth IRA.
A Roth is one of the best savings vehicles for middle-class earners because it lets your money grow tax-free and be withdrawn tax-free in retirement.
Anyone who earns less than $114,000 a year ($181,000 for married couples) is eligible to contribute the maximum amount.
In 2014, you can contribute up to $5,500 per year ($6,500 if you're age 50 or older).
Secret 4. Set aside as much as you possibly can.
You're selling yourself short if you don't save as much as you can every year.
Most advisers say you need to set aside at least 10% to 15% to attain a reasonable level of financial security in retirement.
If you can't do this now, then start small and increase your contributions over time. By doing so, you'll learn to live on less money and won't miss it as much.
Start by saving 3% of your income, then increase that by 1% every six months. In five years, you'll comfortably be socking away 13% of your income.
"People who end up with nice nest eggs are the ones who started early and made it a habit, says David Shucavage of Carolina Estate Planners in Wilmington, N.C. "Once they got into the habit of saving, they started to save more over time."
Our 401(k) calculator shows how your nest egg will grow based on your contributions.
Secret 5. Stay in stocks.
Considering the extraordinary volatility of the stock market over the last decade, you may very well be terrified to invest.
We can hardly blame you.
And while it's OK to be cautious, it's almost impossible to save enough to retire without the power of the stock market.
You'll need an average return of 7% or 8% per year to succeed, and stocks are the only type of investment that can do that.
Sure, the market experiences losing years, but in the long run you'll beat any "safe" investments.
"If you have too much volatility or risk, you reduce your risk, but you don't get out of the market. You won't even outpace taxes and inflation with CDs," says Larry Rosenthal of Rosenthal Wealth Management Group in Manassas, Va.
Secret 6. Keep it simple.
The first $100,000 is the hardest to save.
When you're just starting out, contributions account for most of the growth in your retirement funds.
But the longer you keep at it, the more you'll earn from dividends and capital gains.
Beginning investors struggle by focusing too much on how they invest and what options they should choose, says Mari Adam of Adam and Associates in Boca Raton, Fla.
Your primary goal should be putting money away, Adam says. Start saving now and learn along the way.
"Just do it. Sign up for a 401(k), open an IRA and start saving money," Adam says. "You can learn about (investing) as you go. Don't overthink stuff. Take action and move ahead," says Adam.
Our savings goal calculator will show you exactly how much you must contribute to your retirement accounts to build the nest egg you want.
Secret 7. Never cash out a 401(k) when you change jobs.
Job switch: Where 401(k) cash goes
Source: Employee Benefit Research Institute
|All or part is...||% of workers|
|Moved to non-tax-qualified savings||6.4%|
|Used to pay down debt||38.0%|
|Used for education||1.1%|
About half of all workers cash out some or all of their 401(k) when they change jobs. They not only have to pay taxes on the money, but they have to pay a 10% penalty to the IRS.
This is the single biggest wealth-killing mistake many workers will make in their entire careers.
If you have $10,000 in your 401(k) that you've been building up for years and just cash out, you might be lucky to walk away with $7,500.
You need to roll your retirement savings into an IRA or a 401(k) plan at a new employer to have any chance of saving that first $100,000.
Secret 8. Always have an emergency fund.
Stuff happens. Your car can break down, your AC unit can go out, you can get sick and have hefty health insurance deductibles.
You should always maintain an emergency fund to cover things like this. Most financial advisers recommend having three to six months stashed away.
If you don’t have that much cash now, slowly build your way up to it.
Secret 9. Consider Social Security gravy.
If you want a decent retirement, you can't count on Social Security to provide it.
Look, this program will probably be there for you when you retire — even if you're in your 20s — but it's impossible to predict changes to benefit formulas, cost-of-living adjustments and how retirement ages might affect future benefits.
What we do know is that the average monthly check was only $1,269 in June 2013, according to the Social Security Administration — and that's not much.
Think of your Social Security payments as the gravy on your retirement plans, an extra check that can help make up part of any shortfall in your retirement income.
Secret 10. Sock away your windfalls.
At some point in your life, you're likely to get a financial windfall.
One in four Americans, for example, expects to receive an inheritance sometime in their lives, according to our recent study.
If you get unexpected money from a relative or a bonus from work, play it smart. It could provide a huge positive financial impact in your life.
Start by using it to pay down any high-interest debt you may have.
Then sock the rest away.
This is one of the few ways you have to make up for all of those years when you couldn't — or wouldn't — contribute as much as you should have to your IRA or 401(k) or other investment accounts.
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