It is hard to turn on the news and not hear about the sluggish state of the economy, the low amount of job growth, how much debt the country is racking up… or how seemingly inevitable cuts will be coming to social security benefits in the future because of these factors… So when we hear these things, we need to take a moment and actually look ahead to what those long-term effects could mean for your personal financial future.
While it may seem nonsensical to think that the May jobs report has anything to do with your personal retirement planning, or even your current financial situation, it truly is an indicator of our country’s economic heartbeat and the overall economic impact is actually quite far reaching. When job creation is low, and the job participation rate is low, there are less people paying taxes into the system, and potentially, more people collecting benefits such as unemployment and food stamps. When we are in an economy that is not bringing in more revenue than is going out, we have a budget deficit each year—and that adds to the interest compounding on our current national debt to create an even larger debt. So it starts to become clear as to why this affects you personally: less money going into the Social Security fund now will mean less to come out of it later—when you are ready to retire.
With all of this in mind, it may surprise you to know that 33% of Americans have no retirement savings at all, and less than 25% of the people who do have retirement savings actually think that it will be enough. Do you have enough? How do you know if you are on the right track?
So the first thing that you need to do is find out if your employer offers a 401k program, and if they do, start contributing as soon as you qualify. Why is this so important? There are 2 main benefits from participating in your employer’s sponsored 401k:
- Employer matching—most employers will match up to a certain percentage of your personal employee contributions. It is literally free money. For example, if you contribute 2% of your income from each paycheck, your employer may match that, so your total is now 4%.
- Tax benefits—if you contribute to a traditional 401k, you will get money taken out of your paycheck pre-tax—so that means you are paying less tax now on your current income. If you are contributing to a 401k that has a Roth option, then you will pay tax on the money that you contribute now, but it will grow tax-free!
If you are self-employed or your employer doesn’t offer a 401k, then you can always set up your own IRA, or individual retirement account, and receive the similar tax benefits—you can get a tax deduction for contributing to a traditional IRA, or again, enjoy the tax-free growth of a Roth IRA.
So how do you choose which investment products are right for you? There are several factors to look at: how long you have until retirement, what your goals are, and what you risk tolerance is. Every individual’s situation is unique, so you will need to look at these factors with your financial advisor to determine the best investments. Once you know your time horizon, what your investment goals are, and the type of investor that you are, you may even want to check out these 3 ways to creatively diversify your investment portfolio to further decrease your risk.
Are you a saver or a spender?
With all of the uncertainty in the economy, and even with social security, you want to make sure that you are preparing yourself for retirement—so that you can live comfortably in your golden years without having to worry if the government will cut your social security benefit.
So if you are one of those 33% that have no retirement savings, here are a few ways that you can start saving today—without having to drastically change your lifestyle:
- Take advantage of your company’s 401k matching—it’s literally free money going into your retirement that you don’t have access to now anyways. Example: you put in 1% of your paycheck (you probably won’t miss just 1%!) and your employer puts in 1%, so you are now saving 2% from each pay…
- Pay yourself when you get paid. When payday comes, determine an amount that you want to set aside in a saving (retirement) account. Even if you can only start with $5 per pay, that is fine. Get into the habit of saving and then maybe gradually increase it each time you get a pay raise. If your goal is to save $100 per pay, then map out a plan to get there.
- Give something up. This is hard to hear sometimes because we get into habits or become accustomed to doing things a certain way and don’t want to give anything up. However, if you can sacrifice eating out for lunch one day per week, or give up getting a latte before work, or cancel a membership that you maybe don’t use anymore…all of those are items that you are paying out money for each month, but could live without. So rearranging your budget and putting that money toward savings and retirement will be way more meaningful. Besides, you can pack a lunch and bring coffee from home if you know that sets you up for a better future, right?!
- Don’t spend your tax return! If you get money back when you do your taxes each year, don’t spend it. This is money that you haven’t had access to all year long, when you get the check in the mail, simply deposit it in your retirement account.