Well, if I have to say that you need to save money then I suppose it is three steps. But let’s assume that is something that you already knew and move on from there into what to do next. For many people retirement planning is about as interesting as a root canal and maybe more painful. But it doesn’t have to be that way even for those of you who feel that way. There is no shortage of advice on the internet, and elsewhere, on how to plan for retirement, but it is actually quite simple. The following is for beginners of any age and for those with little saved up and those with lots but just don’t know what to do with it.
First, and immediately, sign up for your 401k and make sure that your contribution is, at the very least, the maximum amount that the company will “match”. Matching just means that the employer will look at your contributions and then add some of their own into the pot. A common formula goes something like this: for every dollar you put in they will put in a dollar up to 6% of your salary. So, If you are making $30,000 dollars a year and decide to contribute 6% of that into your 401k, you will have accumulated $1,800 by the end of the year. In the above example, the employer will add another $1,800 to your 401k and you will have a total of $3,600. Any earnings on that will be taxed deferred until you decide, upon retirement, to begin withdrawals. Now, since the recession many employers have cut back and yours may now only be offering a 50% match. Still, it is important that you look at what the maximum is on your plan. If it is still 6% of your salary (for the 50% match), then it is important to get every dime you are entitled to and make sure that you are contributing at least that 6%.
This alone can make you very successful financially, especially if you are still young (ish). And don’t overlook that tax deferred part of the equation. One nice thing about 401k(s) is that you will never be bugged about paying taxes on your savings. This not only makes great sense mathematically, but psychologically as well. It gives this investment program a feeling of money “under the mattress” as the IRS will not have their hand out until retirement (at least). As step 1(a) if you will, an IRA (Individual Retirement Account) also offers tax deferral and should be utilized as well. But that is for additional savings only. A 401k is of the absolute highest priority due to the matching feature.
Step two is for those additional savings. An IRA would be an excellent vehicle, but of course, the contributions are limited and many of you may already have savings above and beyond those limits. But, whether in an IRA or not, it is imperative that you own stocks. Now, this is where it can get somewhat complicated in that it is important how close you are to retirement. But, as I mentioned at the beginning of this post, this is mainly for people that haven’t done anything yet, except maybe save. What percentage of your assets should be in what category is a discussion for another time. Regardless of your age though, stocks should be there somewhere and it is as good a time as any to get started. That does not mean take all of your savings and dump it into a stock tip, or even a bunch of stocks. It does mean that some portion of your money should be in stocks, because only stocks have the potential for both growth and keeping up with inflation. To be fair, gold and silver could offer both if the U.S. is in crisis which many people are expecting. But assuming we will go along as always, stocks offer something similar to housing over the long term. Like your home, stocks keep up with inflation, albeit in slightly different ways. While a $20,000 house in 1973 might be worth $200,000 today that is almost entirely due to the cost of living going up over a long period of time. And while a business experiences the same thing with their property they also have to pay more for their raw materials. But, while Procter and Gamble may have higher costs to make Crest toothpaste than the did in 1973, they are also charging more. That, in a nutshell, is why stocks are considered great long term investments to fight inflation. Of course some companies will grow far above any inflation rate as well, bringing in even further returns.
I am going to get into this further in my next post, including how and what stocks to buy for the beginner. But that is really a secondary issue (although important) to the first two steps. Get in your 401k and make sure you own stocks. If you follow those two simple things you will be way ahead of the vast majority of people in your quest to retire.
This article was first published on http://moneyprime.com.