When you’re young, retirement feels a lifetime away. However, you’d be surprised at how quickly time can pass. But saving for retirement is about more than when you’re old. It’s about setting positive habits for future saving and investing that can last a lifetime.
1. Start by Saving
The first step in saving for retirement is to get into the habit of saving. Set up separate savings accounts for an emergency fund/ retirement fund and contribute to it regularly. If possible, set up an auto-deduction each month. That way you’re less likely to forget about it.
2. Build an Emergency Fund
During the great recession, many people without savings found themselves forced to draw from their retirement accounts or their credit cards in order to make ends meet. Having an emergency fund can serve as a lifeline when you’re faced with unexpected expenses like auto repairs or medical expenses. The best part, if you don’t have an emergency, you can always invest the money in your future.
3. Open a Roth IRA
Even if you aren’t employed at a job with a 401(k) plan, you can get started with a Roth IRA. Unlike a traditional IRA, you can’t take the money out pre-tax, but when you withdraw the money in retirement, it will be tax-free.
On average, you can put up to $5,500 in a Roth IRA. Even if you can’t save the max, save what you can; it adds up over time. To make sure you stick to saving, have a portion of your paycheck automatically deposited into the Roth each month or every few weeks.
4. Invest Aggressively
This doesn’t mean that you should invest your life savings in penny stocks, but if you are able to invest in retirement funds, it’s a good idea to invest in higher-risk portfolios that emphasize stocks over bonds. The reason for this is that while stock investments can be volatile in the short term, over time they tend to grow in value. If you don’t need to cash out your investments, let them grow. As you get older you can move your money into bonds and other investments that are safer in the short-term.
5. Don’t Stop Saving
When you have a job, don’t stop. Set up a 401(k) and contribute as much as you can comfortably. If you’re eligible to participate in a 401(k) at work, do it. Most employers match your contributions in order to encourage your participation. When you sign up, the money you save will be automatically deposited into the plan before it’s taxed, so less of your income will be taxed now. That saves you money, too. Contribute as much as you can, but don’t leave yourself strapped for cash.
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