It is never too early to plan for retirement because what you think about and do now could have a significant impact on your future. Being 30 to 40 years away from retirement doesn’t mean that you can wait until you are in your 30s or 40s to start planning for retirement. Start managing your money now and reap the rewards when you have paid your occupational dues. Below, you will find three things to think about doing now so that you can be comfortable after retirement.
1. Retirement planning should begin with your first job
It may seem like you have a lot of time. However, time can be your friend or your enemy when it comes to retirement planning. It can be your friend if you start planning early. It can be your enemy if you wait and find yourself 20 years in the future wishing you had started planning as soon as possible.
If your first job is with a company that offers a 401(k) plan, sign up as soon as you are able. If your employer doesn’t offer a 401(k) option, you can have a percentage of your paycheck deposited into an IRA. There is a very good chance that you will find yourself older and retired someday, so you’ll be glad you started that retirement plan. To keep the retirement money growing, you can set up automatic contributions to your retirement accounts. Getting accustomed to these contributions from the very start means they will be virtually painless over time.
As for the ideal income percentage to contribute, 7% is a good number in the beginning. Over time you can increase the percentage to 15%. That 15% will continue to grow in dollar amount as your income increases over time.
2. Difficult times are going to happen
Unexpected events are going to happen that will require you to spend money. It is important to start stashing money into an emergency fund right now. This fund should be accessible so you can withdraw the money without any fuss.
The easiest way to set up the emergency fund is by diverting a portion of your income into an interest bearing savings account. This is in addition to any money you are diverting into your retirement accounts. The last thing you want to do when faced with an emergency situation, such as job loss, is withdraw money from your retirement accounts.
Using retirement accounts to satisfy an emergency will cost you even more than the retirement money you’re losing. For example, you may withdraw $10,000 from a retirement account because you lost your job. If you are in the 25% tax bracket, you will lose $2,500 to the IRS in taxes and another $1,000 penalty for withdrawing the money before reaching 55 years old. For an IRA, the age in which you can withdraw without a penalty is 59 ½, but certain exceptions may exist if you must withdraw early. In all reality, the $10,000 you withdrew is actually $6,500 after taxes and penalty. That is also $10,000 less in wealth you have upon retirement.
3. Know that money has value
When you’re young, it can be easy to see something online or on a store shelf and want to buy it. That $500 4K TV may look pretty good. If you have the money, it can be tempting to buy it. If you think about how many hours of work you have to do for that television, you may reconsider the potential purchase.
The same concept can apply to credit since you want to limit credit use. The last thing you need when you retire is to have high credit card debt. If you apply the same concept of placing value on money when making purchases on a credit card, you may charge less. In fact, it is great for your credit to charge less, pay off the balance, charge again, and then pay off the balance again. Having a high credit score is what you need to buy a home and a nice automobile.
Now is the Time
Now is the time for you to start planning. If you don’t have children yet, you may. It is good to start putting your affairs in order as soon as you start working so that you can take care of yourself and your current and future family. You will be glad that you did the day you clock out for the last time and live the rest of your life doing the things you love.