Retirement is the biggest expense for which you will save, and it takes between 30 and 40 years of work. It's a challenge for most people, but the sooner you start, the easier it will be. Here are four steps you should take today to give you the best shot for a comfortable retirement.
Create a retirement plan
Without a tangible retirement plan, it is likely that you underestimate the amount you really need, which could rob you of your capital in the last few years. Start by estimating your life expectancy and calculate high. According to the Social Security Administration, one in four 65-year-olds will live more than 90 years and one in ten over 95 years old. Subtract the age at which you plan to retire to estimate the length of your retirement.
Next, calculate your estimated annual living expenses at retirement. Do not forget about housing, utilities, groceries, insurance, health care and taxes. Add them up and multiply them by the number of years of your retirement, adding 3% per year for inflation. A retirement calculator can take care of that for you. It should tell you the total amount you need to save and the amount to be saved monthly to reach your goal. It depends on your estimated rate of return. You can use 7% to 8%, or 5% to 6% if you want to be conservative.
Subtract from your estimated total retirement costs any amount you expect to receive from a 401 (k) employer, a pension, or social security. You can estimate your social security benefit by creating a My Social Security account. The rest is the amount you have to save yourself for your retirement.
Open retirement accounts, if you do not have one
If your employer offers a 401 (k), it's a good place to start saving, especially if your company pays a share of your contributions. Most of the 401 (k) s being tax-deferred, your contributions reduce your taxable income this year, but you pay taxes on your distributions when you retire. Roth 401 (k) s become more popular, however. You pay taxes on your contributions to these accounts this year, but you do not have to pay taxes on your retirement distributions. You can contribute up to $ 19,000 to a 401 (k) in 2019 or $ 25,000 if you are 50 or older.
An IRA is another option if your employer does not offer a 401 (k) or if your 401 (k) charges a high fee (more details below). You can choose between traditional IRA or Roth IRA, or have one of each. Traditional IRAs are immune to the tax, while Roth IRAs operate similarly to Roth 401 (k) s. You can only contribute up to 6,000 USD to an IRA in 2019 or 7,000 USD if you are 50 or older, but IRAs offer more flexible investment options and their costs. administration are generally lower. As a result, some people prefer 401 (k) s.
Check how much you pay in fees
All retirement accounts charge fees to cover tasks such as record keeping and special services such as 401 (k). You may also pay a fee when you buy or sell an asset, and some investments, such as mutual funds, charge shareholders an annual fee, called the expense ratio. You do not realize that you pay these fees because they come directly from your accounts, but they add up quickly and can reduce your profits.
You can check with your plan administrator or the human resources department of your company if you do not know how much you are paying in retirement account fees. You can also consult the summary of your plan or the prospectus of your investments. But you should not pay more than 1% of your assets in fees each year. This is no longer a problem for 401 (k) s, especially with small businesses as the administrative costs are spread among fewer employees. If you pay more than you want, ask your employer to offer more low-cost investments, such as index funds. These are mutual funds that passively follow a market index and are known for their consistent return at reduced fees. If your employer refuses, consider transferring your money into an IRA, unless your employer's 401 (k) correspondence covers what you pay for.
Boost your contributions
When you created your retirement plan, you should have figured out how much you needed to save each month to reach your goal. Try to save at least as much if you can. But if your budget does not allow it at the moment, save as much as you can and try to increase your contributions by 1% of your salary per year until you reach your goal. Take advantage of the 401 (k) match offered by the employer, unless you absolutely can not save money. It is free money, after all.
If you want a relaxing retreat, you must take steps to prepare for it now. Use the four tips listed above to get started, then re-evaluate your retirement plan one or two years to make sure you're always on the right track.