Saving for your retirement may not be as exciting as blowing a paycheck on a fancy vacation or as immediately rewarding as paying off debt, but creating a nest egg to help finance your golden years will give you both financial and psychological peace of mind.
Retirement savings can help you avoid relying on Social Security or family members for money later in life. Saving can also give you access to a tax-deferred retirement account that will reduce the taxes you owe on income and avoid/defer taxes you owe on accrued earnings. Not saving for your retirement could result in you spending the prime years of your career attempting to furiously make up for a lack of financial foresight.
Here are three important retirement savings strategies that can help guarantee a fiscally sound future:
1. Get started early
If you’re early in your career, it might be tempting to ignore saving for retirement. After all, life is expensive and retirement seems lightyears away. However, if you neglect saving now, you’ll miss out on the joys of compound interest. Compound interest is when the interest you’ve earned on the money you’ve saved begins earning its own interest. In other words, the earlier you start saving, the more money you’ll earn over time. If you wait to save, you’ll be playing catch up later on.
Your retirement asset allocation should ideally be a mixture of stocks, bonds, and cash. Sure, betting the house on up-and-coming tech stocks and earning a windfall would be nice, but the stock stars rarely align like that. At the same time, moving exclusively into bonds and out of stocks means you’ll have weaker long-term results and won’t hedge as well against inflation.
Risk tolerance decreases as you age, so your allocation amounts may change. For example, as you get older, you may scale back on stocks and have a greater percentage of bonds. But you should still keep your fingers in all three savings pots.
3. Research your workplace options
Don’t assume that the plan or contribution rate you’re automatically enrolled in is best for you. For example, if you’re auto-enrolled in a 401(k), odds are that your contribution rate is set very low. Your rate could even be set so low that you won’t be able to claim the maximum matching contributions. Do your research, check out the different plans and rates, and pick the one that sets you up for success.