7 Rules to Follow to Retire On Time (or Early)
Being young in 2017 isn’t as easy as it might seem. You probably just got out of college, moved back in with your parents, got your first job, got your first place, and are getting ready to tackle the world as an adult. Or perhaps you haven’t done any of those things yet or you feel like you’re falling short. I’m sure the last thing on your mind right now is saving for retirement. But don’t let the 401k intimidate you. The truth is, that you’re now in a great place to start saving. Yes, you can start in your thirties or even forties, but timing is more important because of the power of compounding interest, rather than just savings rate and investment selection alone. Taking advantage of a 401k plan in your twenties can give you a great opportunity to save more and, possibly, retire early. Here are seven tips to help you get started!
- The most obvious one: budget and live within your means. Between a car payment, insurance and rent payments, not to mention other bills and unplanned expenses, it’s hard to willingly give up whatever money is left from your paycheck. You can afford to contribute to a 401k; it’s just a matter of finding the will power to do it.
- Don’t throw away money. While you still may not be convinced that contributing money to your 401k is the way to go, keep in mind that many employers will match what you save in your 401(k), up to a certain amount, which can be low as 5%. If not, you could be cheating yourself out some serious money, possibly thousands. So find out how much of your income your company will match.
- Roll over as you go. Don’t be concerned if you aren’t planning on staying at your current job, most young people don’t. You can make contributions while employed, and when you move to the next opportunity, you can rollover your account to your new employer’s plan or to an IRA. Just don’t cash out your 401k upon leaving. That generates income taxes and a 10% penalty, diminishing the amount that can compound.
- Avoid taking loans against your 401k. It may be tempting to borrow some cash against your 401k, but don’t do it! This money is for your retirement and, unless you’re in dire need, that’s where it needs to stay. Remember that you fund your 401(k) loan payments through payroll deductions. That means that while you are paying the loan back, you’ll have less money available to put into your retirement. Not to mention that if you don’t pay the loan back within the terms of the loan, you can be subject to a 10% early withdrawal penalty tax. In other words, if you are in desperate need of money, you should exhaust all other options before turning to your 401k for a loan.
- Take the easy way out. Go with a target-date fund with your investment options, which automatically amends your portfolio to be less risky as you age. The worst-performing target-date investors at Vanguard earned 11.8% annually over the past five years, far outpacing the worst DIYers, who gained just 2.1%. Move your accounts with you.
- Keep the bottom line top of mind. When you start to see some serious money in your account, keep in mind that the bigger your balance, the more fees you will have to pay in dollar terms. So shift to lower cost options, like an index fund.
- Finally, ask your parents. I know, it seems redundant to ask your parents for advice, now that you’re an adult – you should know this by now! And while you shouldn’t depend too much on their advice, it can be helpful to get their perspective. Parents who can provide their children with ongoing financial support, regardless of whether that is financial information or even a little money, empower them to start thinking and planning for the long term.
So, whether you have a job or are still on the hunt, there’s planning and action needed now if you hope to have a stable retirement future. So get started and good luck!
Written by FTWCCU employee, Reynee Rainey.