Congrats! You just scored your dream job. Now, what are your retirement plans?
If that seems like a strange question, think again.
That’s barely enough to cover one month of living expenses. Which is why knowing how to plan for retirement is so important — at any age.
The truth is, it’s never too early to start planning your retirement. Most jobs offer retirement and savings packages. But even if they don’t, you can start a savings and investment plan on your own.
Keep reading to discover your options.
Consult Father Time
Your retirement plan depends on the longevity of your life. While no one can predict how long they’ll live, you can estimate your life expectancy.
This will help determine how much savings you need. The average American lifespan is currently hovering right around 78 years old.
You should also consider your lifestyle choices and family medical history. While there’s no perfect calculation, you can guesstimate how long you’ll live following retirement within a few years.
Another factor is at what age you plan to retire. This will determine how many unemployed years your retirement plan should sustain you.
Bear in mind, you won’t receive social security benefits until after the age of 62 (regardless of when you retire). And you won’t receive full benefits until you reach your retirement age. The Social Security Administration (SSA) determines your full retirement age based on your date of birth.
Speaking of “unemployed”, do you plan to work after retirement? Although the point of retirement is to no longer have to work, some people want to work to keep busy and socialize.
If you plan to work following retirement, you may not need as much money in your savings. But it’s important to note that working may impact how much you receive from social security.
So whether you want to use these essentials to finally write that book you’ve been writing or work part-time at a retail store, make sure your income doesn’t exceed the limit set forth by the SSA.
Budget, Budget, Budget
Budgeting is a life skill that some people never master. But it’s extremely important when deciding how to plan for retirement.
The simple equation of income versus expenses will take you far in your retirement plan. Sit down and calculate how much you have in savings and what your expenses are.
- Insurances (home, health, car)
- Car payment
- Utilities/Home maintenance
- Fun money
Some governmental jobs offer a pension and annuities after retirement (police, teachers, and the like). This is a monthly amount you can rely on as part of your income.
Don’t make the mistake that so many retirees do — blowing their money on a lifestyle they “deserve”. Most people believe they deserve to live in a gorgeous home, drive a nice car, and travel the world when they retire. After all, you’ve worked all your life for this moment.
While this may be true, if your bank account doesn’t reflect your expensive taste, you could find yourself in hot water (and not the relaxing hot tub kind)! Be realistic about your income and expenses and avoid living beyond your means.
Consider Your Savings Options
Now that you’ve figured out how much you need to save, let’s discuss how it’s done. Gone are the days of collecting change in water jugs or stashing cash in your freezer.
There are much safer and more financially sound ways to create a retirement savings plan. Most employers offer a 401(k), IRA, or other retirement packages. No matter how young you are upon hire, it’s in your best interest to take advantage of these services.
Here’s a closer look at each one.
This is a savings plan that allows employees to invest a certain percentage of their salary every pay period. Most 401(k) plans invest your money in mutual funds, stocks, and bonds. Some companies will even match your contribution.
Before choosing what percentage you want to invest, calculate your current expenses. Don’t strap yourself financially now to save for retirement.
Calculate your daily expenses and choose a reasonable amount to invest. You should barely miss this amount from your paycheck but be enough to create an adequate nest egg over time.
You can set up an IRA (individual retirement account) at any age through your personal insurance company. The amount you can invest each year depends on your annual income.
In some cases, you may earn too much money to open an IRA. Most qualified individuals can contribute between $5,500 and $6,500 to their savings annually.
One of the most important things for young workers to understand when starting out is the value of compound interest. You can open a basic savings or retirement account that gains high interest with little to no effort on your part.
What makes compound interest so appealing is that you gain interest (and money) on your initial investment (the principal) and on any interest you earn over time. This helps your savings build much faster.
The more money you deposit, the more money you’ll earn. The real trick is fighting the urge to tap into these funds. Creating and sticking to a retirement savings plan at a young age means having willpower and a solid vision of the future.
Take a Risk
While touching your retirement fund is a big no-no, there are a few advantages to considering how to plan for retirement early in your career.
The greatest benefit is that it gives you more time to save. You won’t find yourself scraping money together for retirement at the age of 50.
Another benefit of starting a retirement plan early? Risky business.
Because you’re young and have time to recover, you can take slightly bigger risks with your investments.
Most financial advisors and IRA’s invest in stable, reliable stocks and funds. While the gains aren’t huge, they’re consistent.
If you like to gamble, you know the adage, “go big or go home”. The riskier the bet (investment), the more rewarding the windfall if things go your way.
And if they don’t, you have plenty of time to recover your loses. You also have time to ride the wave and see if your stocks take another, unexpected upswing.
How to Plan for Retirement When You’re Just Starting Out
It’s never too soon to start planning for your future. Kids dream of what they want to be when they grow up at the age of five.
Second-year high school students are already considering colleges. So, why not give some thought to how to plan for retirement when you first enter the job market?
This gives you plenty of options, opportunities, and time to create a solid financial plan.