Although retirement may be decades away when you’re in your 20s and 30s, it’s an important milestone to start planning for. The earlier you start thinking about and preparing for it, the less likely you are to have to play a game of catch up as retirement approaches. To get yourself started with retirement planning, consider these six ways to prepare:
Open an account already. If your employer offers a savings vehicle, such as a 401(k), take advantage of it. You can also open your own traditional IRA or Roth IRA. While saving early is important, so is the habit of doing so automatically on an ongoing basis. By setting yourself up with automatic paycheck deductions or transfers to a Roth IRA, you’re getting into the habit of putting money aside for your future. Aim to save at least 10 percent of your gross income and work up from there.
Take advantage of free money and benefits. Employee benefit booklets are not the most riveting read, but they’re full of useful information. Find out if your employer offers a health savings account, dependent care savings account and flexible savings account. These benefits will reduce your taxable income and increase your ability to save more. In addition, find out if your employer offers a 401(k) match. If so, they are giving you money for retirement, so take advantage of it. A 401(k) match typically requires you to contribute a certain amount of your base pay up to a pre-set limit, and the company will match your contribution with funds of their own. For example, your employer might match 50 percent of your personal contributions to your 401(k) up to 6 percent of your salary.
Understand how compound interest works. When you invest, you earn interest on your money. You then earn interest on that interest. This is called compound interest. This extra bit of compounding interest can really make a difference over the course of a working career. The best way to show its power is with a basic example:
Let’s say you start saving for retirement at age 25, invest $100 a month for 10 years and then stop at age 35. You will have contributed $12,000, and with an annual interest rate of 6 percent your balance will have grown to $15,996. If you leave this savings in a retirement account until age 65 and it continues to earn 6 percent annual returns, you will have $91,873 at 65.
Now assume your friend, Late Larry, waited until age 35 to start investing. He contributed $100 a month for 10 years until age 45 and received the same 6 percent annual return. Even though he contributed and earned the same amounts, his account is worth only $51,301 at age 65, far less than if he had started saving at age 25.
Increase your earnings potential. One of your most valuable assets is your ability to earn an income. The more you learn and the further you advance your career, the more you will be able to enhance your earnings capabilities and ability to save. There might be skills or certifications you could acquire to enhance your value or diversify your experience. You could also attend conferences, events or trainings that could lead to new opportunities. When it comes to your education, subscribing to the lifelong learning model will help keep you employable as the job market changes. You could also pursue knowledge about related industries and fields. Some of the most creative and refreshing ideas can come when you’re exposed to how other businesses are doing things.
Get out of debt. Keep in mind that not all debt is created equal. If you have high-interest credit card debt, this should be one of the first things you try to pay off because it’s costing you the most. Then, look at your other debts and decide the most effective way to repay them.
As you pay off your debts incrementally, put your “extra” payments to new debt. For example, if you paid $150 a month to a $2,000 debt, but recently paid it off, put that $150 toward another debt in addition to the amount you’re paying now. You won’t miss the money and you’ll increase the speed at which you pay off your outstanding debts.
Get a financial education. It’s incredibly important that you understand what is happening with your money. Ask questions of your accountant, attorney and financial planner. Read books on personal finance. Read the fine print on contracts, agreements and anything else you put your signature on, and ask questions before signing. Knowledge will help you to grow your money, and there are no stupid questions.
Mary Beth Storjohann is a certified financial planner for Gen Y and the founder of Workable Wealth.
More from U.S. News
10 Best Places to Retire on Less Than $100 a Day
7 Ways Social Security Will Change in 2016
10 Retirement Savings Tips for 20-Somethings
6 Ways to Prepare for Retirement in Your 20s and 30s originally appeared on usnews.com
