Tuesday, August 13, 2013

Get an Early Start on Retirement

Think you can’t afford to save in your 401(k) when you make $50,000 or less?  You can’t afford not to.
Whether or not you’ve just thrown your graduation cap in the air or you’ve been building a career for a few years now, you’ve probably had more pressing financial concerns than saving for retirement.  Like how you’ll make the rent and also eat.  Or whether you’ll ever get out from under the crush or your student loans.  No wonder that a recent Wells Fargo survey found that fewer than half of millennials ages 22 to 32 were socking away cash for retirement—and that nearly 90% of those who weren’t said lack of money was the reason.
Waiting until you’re more secure financially, though, will cost you plenty.  Contribute steadily to your company savings plan starting in your twenties, and you have a good shot at being a millionaire by the time you retire.  Hold off, and that seven-figure stash gets more elusive.  How can you swing it?  These tips will help.

Get Some Perspective
Eight in ten of the nonsavers in the Wells Fargo study said they needed to pay down debt first.  A worthy goal, but one you should pursue simultaneously with, not ahead of, saving for retirement.  For one thing, most employers kick in $0.50 for every dollar you put in, up to the first 6% of your salary.  That’s an automatic minimum of 50% return versus, say, a 6.8% return whey you pay down student loans at that interest rate.  Plus, as Wharton professor Olivia Mitchell notes, “The money you put into a 401(k) or IRA benefits from a lifetime of tax-free compounding.”  That is, you not only earn money on your investment, but your earnings earn money.  The sooner you start, the greater the magnifying effect.  The bite from your paycheck may also be more manageable than you think, since you contribute with pre-tax dollars.  The after-tax cost of saving $3,000 a year, or 6% of a $50,000 salary: just $43.00 per week.

Free Up Cash
To come up with that scratch, eat a brown-bag lunch a couple of times a week, and drink the office swill instead of caramel macchiatos.  Opting for income-based repayment of your federal student loans instead of your standard plan can also help—if you make $50,000 and owe $30,000 you’d reduce payments by $68 a month, says financial aid advisor Kal Chany of Campus Consultants.  Sure, that will extend the life of your loan, but it’s worth it if you put the cash in your 401(k) and get an employer match.

Take Baby Steps
Start contributing a modest amount—say, 3% of your salary—then bump up by a percentage point a year, until you’re up to the recommended savings rate of 10%.  Time the hikes to your annual raise, and you won’t even feel the pinch.  Or, if your employer offers this feature, elect automatic annual increases.  Research shows that workers who use this set-it-and-forget-it approach end up with substantially bigger balances.

Article by Zain Asher in the September, 2013 issue of Money Magazine.

Tom Newsad has been building relationships in the Middletown area for over 20 years.  Newsad Insurance Services offers life, health, disability and long term care insurance as well as fixed and fixed index annuity products.  Tom serves clients in Butler, Hamilton, Montgomery, Preble, Miami, and Warren counties and beyond.

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