Most of us dream of the day we can walk away from having to exchange time for money for good. The sad truth is that many will not be ready for their golden years. That’s why it’s important to start to prepare for retirement as soon as possible. The earlier you start preparing, the more likely you are to have a comfortable retirement. Here are some steps to take.
Automate Your Savings
According to Ramit Sethi, the personal finance whiz behind the blog “I Will Teach You To Be Rich,” automating is key. Signing up for your company’s 401k plan, at least to the limit of any company match, is one of the easiest ways to get set up automatic savings for retirement. Additionally, it’s pretty easy to set up automatic payments to a brokerage account each payday. Saving even 5 to 10 percent of each paycheck will help you start to build capital that will grow over time to become a nice nest egg. Automating the process makes it more likely that you’ll actually achieve the goal.
Ramp up Savings
In addition to automating your savings, putting away as much as is humanly possible will allow you to speed up in the race to retirement. Every dollar that is not spent is a dollar that can grow in an investment account. Rather than saving what is left after spending, Warren Buffett recommends spending what is left after saving. The more you can save today, the better. This is important to remember because of the time value of money that can compound for decades.
Look into Taxable Accounts
Tax-deferred accounts are great when it comes to saving for retirement, but if you’re serious about retiring earlier than most people, it’s a good idea to remember taxable accounts. While you’ll have to pay taxes up front, taxable accounts allow for more flexibility when it comes to withdrawing without an early withdrawal penalty. For any tax-deferred account it might pay to look into a Roth IRA conversion ladder that can allow for early withdrawals without having to pay penalties. A mix of taxable and tax-deferred accounts can work well.
Diversify Your Investments
Investing in one company is a bad idea. What if that company goes bankrupt? Your stock will be worthless, and you’ll have little left for your retirement. This is why investing in a number of stocks is a good idea. The easiest way to invest in a range of stocks is through an index fund. There are funds that chart particular indexes like the S&P 500. There are also funds that invest in the entire US stock market, such as Vanguard’s Total Stock Market Index Fund. This means that if one, or even a dozen, companies in the index fail, you’ll still have plenty of companies that are working for you.
When starting to look at retirement, it’s important to plan ahead as early as possible. The power of compound interest can really start to work for you if you get a head start. Automating your savings and diversifying through a number of asset classes can also help to protect your investments as you look forward to your golden years.