As you move through your 30s, your mind is likely on many things—that next step in your career, buying your first home, starting a family—but retirement may not be one of them. As far off as that stage of life may seem, retirement savings should move to the top of your to-do list. Make a commitment to start now, and you will be well on track to have $1 million ready and waiting when that day arrives.
Not sure where to begin? These simple steps should set you down the right path.
Kick your 401(k) into high gear
If your employer offers a 401(k), it’s a no-brainer to take full advantage of all it has to offer. Most companies allow you to set it and forget it, with tax-free contributions swooping magically into your account right from your paycheck.
Contribute the maximum amount allowed every year—$19,000 in 2019—possibly by adding some, or all, of your raises or bonuses into the account. If this is too rich for you, then work steadily toward it by increasing your contributions slightly every year.
If your employer matches contributions, so much the better. The goal is to eventually have 10-15 percent of your annual income going toward retirement. Approach this slowly, and you likely won’t even miss those wayward dollars.
Open an IRA
If you’re in the enviable position of maxing out your 401(k) contributions, or if the fees are too high, a personal IRA can be a great supplement or alternative. If you’re under age 50, you can save as much as $6,000 in 2019. There are several options under this umbrella:
- A Roth IRA offers decades of tax-free compounding interest and the potential for unlimited earnings (you never have to cash out). Note that there is an income ceiling—$122,000 for singles, $193,000 for married couples filing jointly.
- A deductible IRA has no income restrictions but applies only if you are not already contributing to your employer’s plan. Contributions are deductible, and you owe taxes only once you start withdrawals.
- A nondeductible IRA has similar properties to the deductible but is open to anyone, regardless of other enrollments.
As a fairly young investor, you have a distinct advantage over everyone else—time is on your side. This means that you can likely handle a higher level of risk in your investments. If the market gets volatile or has a prolonged dip, your long-term horizon is more forgiving than that of people closer to retirement.
So get out there and be aggressive. Allocate as much as 80-90 percent of your assets to stocks. This will put you on a path to much higher returns over the years, but that path will likely have its bumps—large company stocks, on average, lose money one out of every three years. But that ratio still works in your favor. Keep a firm grip on the wheel, and you will ride out most any storm that comes your way.
Change jobs with caution
You’ve decided that it’s time to move on from your current position. Perhaps a higher salary, a bigger office or more generous perks await you. But in jobs, as in comedy, timing is everything. Your current employer likely requires a certain amount of service to the company in order for your 401(k) benefits to fully mature, also known as “vesting.” Before you give your notice, see where you are in that process, or risk leaving money on the table.
When you do leave, avoid the temptation to cash out your 401(k). If you do this before age 59½, the IRS will step in to take a 10 percent penalty over and above your income taxes, which by themselves could be substantial (as much as 37 percent). Instead, roll it over into an IRA, which allows you to keep everything and continue to invest.
Learn to walk and chew gum
While retirement should remain your top saving priority, make room for other goals as well. If you’re contemplating settling down and starting a family, allot some investments for a house, schools and camps, debt payments and—of course—college. This last item can seem as daunting as retirement itself. But apply your retirement savings philosophy to college, and it, too, will be attainable.
Oh, and don’t forget that emergency fund. Keep at least six months of expenses at the ready.
While it can be tempting to splurge on a dune buggy or a jaunt to Florence, Italy, the astute saver knows that a retirement fund is the smartest place to store that raise or bonus. It’s easy to get off track when you’re driving solo, so consider enlisting the aid of a financial professional to keep things moving along smoothly. Get started today with our free e-book, Your Complete Road Map to Retirement.