There is no shortage of financial advice and information in today’s world when preparing to save for retirement. Still, if there are two universal lessons to be gleaned from this story, they are that it is never too early or too late to begin planning and saving for your retirement; and that you are best served seeking the assistance of a qualified, trusted financial adviser to set you on the right course for executing your plan.
“I tell people that a good coach has a good game plan. The same thing can be said about your finances. Talk to more than one financial adviser and get recommendations. Find someone you trust to help you start saving for retirement if you haven’t already because it will increase your chances of being successful later,” says Steve Olejniczak, financial adviser with Edward Jones in Urbandale.
Olejniczak says that while each client brings to the table his or her own unique set of financial circumstances, he says most people are best served following basic strategies when beginning to save for retirement. They include identifying your retirement needs, paying off credit card debt, establishing an emergency fund, creating and adhering to a household budget, enrolling in employer savings plans or IRAs, and diversifying your assets.
“The first thing is to pay yourself and get started with your plan,” he says. “Take advantage of your employer’s 401(k) and their match. That’s free money.”
Olejniczak says people often make the mistake of thinking they have to pare down their debt before they can begin to pay themselves. He says there is no time like the present to begin accumulating wealth.
“You can do both at the same time with some planning,” he says.
Paying off credit card debt, for example, yields dividends. If you carry high levels of credit card debt, paying it off should be a priority, especially if it carries a high interest rate. Experts say that reducing credit card debt is possible if you rein in your spending and use your credit card wisely.
After that, they say, start saving money for an emergency fund. If your company has experienced layoffs or is in bad financial shape, you might want to have a bigger emergency fund equal to six to nine months of your earnings.
“Learn to live within your means and start a rainy day fund in which you set aside at least three to six months worth of cash to survive if needed,” Olejniczak says. “Learn how to use a budget; don’t shoot from the hip.”
Those who are self-employed or work for a small company that does not offer a 401(k) retirement savings plan should consider opening up a traditional individual retirement account (IRA) or Roth IRA account, both of which are tax-deferred. Olejniczak says they are among the best tools to save for retirement and that you can also roll over savings from a 401(k) opened with a previous employer without risking losing a sizable portion of the balance due to penalties for early withdrawal.
“So many people leave their employer and cash out their 401(k). Instead, take advantage of what you’ve earned and open a self-directed IRA,” he says.
New rules implemented in 2013 allow you to contribute more to an IRA or Roth IRA than ever before, Olejniczak says.
“Those under 50 can now contribute up to $5,500 compared to $5,000 last year for an IRA and Roth IRA. You can also do what we call a ‘Catch Up’ in which you can add another $1,000 to the account if you’re over 50 years old. So you could contribute as much as $6,500,” he says.
Time is an important factor when preparing for retirement. Your retirement account should take advantage of the concept of compounding interest, experts say, which allows your investment income to earn more income over time.
“I talk to people about the cost of waiting,” Olejniczak says. “If you’re 30 years old, you have more time for your money to grow than if you’re 40.”
Olejniczak says the cost of waiting three years based on a hypothetical value at age 65 at a 7 percent hypothetical rate or return with an annual contribution of $5,000 can be dramatic. For instance, at age 30 you can estimate a savings of $826,527 compared to $575,931 for starting at age 35, or $397,259 for investing at age 40. Those numbers are speculative, but they underscore the importance of starting early.
“People make the mistake of thinking that they have to make a lot of money before investing, but that’s not true. Both of my kids have a Roth IRA, and it will help them years from now,” says the 49-year-old financial adviser, husband and father. “But if you’re in your 40s and you haven’t started saving, it’s not too late and you’re not alone because it is not uncommon to talk to people who know that they are behind the eight-ball. We have products to help project your liabilities and assets, and they tell you how much to invest in an IRA or Roth IRA, for example. There are many planning tools.”
Retirement income needs vary, so when determining how much money you need to retire, financial advisers start with basic factors such as your current income, age now and age at which you plan to retire. They also consider your estimated income during retirement as well as how much money you’re currently guaranteed from a pension and Social Security.
Your life span is another important part of the equation because if you retire at 65 and live to be 95, you have to plan for the costs incurred during those 30 years. Inflation is also considered in determining what your money will be worth down the road.
While most Americans project that saving $1 million for retirement will suffice, some say it might not be enough. A poll conducted in 2010 by Scottrade Adviser Services projected the savings needed by generation. “For Generation Y, ages 18 to 26, the consensus was these young people would need at least $2 million, but a strong minority of the financial professionals cautioned this generation should target $3 million. Generation X, ages 27 to 42, the range was between $2 million and $3 million. Among Baby Boomers, ages 43 to 64, most agreed they needed $1.5 million to $2 million. For seniors, the advice was to aim for between $500,000 and $1.5 million.”
Jason Wiltse and Matthew Onstot, wealth advisers and co-founders of the independent firm Wilon Wealth Management in Urbandale, say their clients often seek advice on how to save for retirement while balancing other financial responsibilities. Most of their clients, they say, have a net worth of least $500,000 and they are financially responsible, committed savers.
“It depends on their goals. Maybe they have a business that is starting to make money or they want to pay for their child’s college education,” says Onstot. “We can advise them what to do and still save for retirement.”
Wiltse says the key to investing is adhering to goals and avoiding mistakes.
“We can manage risk, but we can’t control performance,” he says.
He also suggests avoiding misconceptions such as young people should always take more risks in their investments or that people with sizable assets are always fiscally responsible.
“You have to be able to sleep at night when determining the risks of an investment. You have to achieve balance,” Wiltse says. “People also fall into traps when they start making money whether it be buying a new car or an expensive house. We see that a lot with young professionals who also juggle high student debts from college. They need to plan to save and to invest, too.”
Onstot and Wiltse say they encourage those saving for retirement to begin proactive, goals-based, comprehensive planning that helps them grow, maintain and transfer their wealth. They help clients achieve those goals by employing a wide range of money managers so that each client can rely on a team of portfolio managers as opposed to one individual. The advantage, they say, is so that should your goals change you can easily switch to a money manager who is better aligned with your needs.
“We like to do planning all the way down to the dollar,” says Wiltse. “We’ve always looked at it in those terms and now we see more clients wanting to look at it the same way.”
Most important, Onstot says, is to simply get started. Take the first step to start saving for retirement now.
“It’s so easy to set up automatic investments like saving money each pay period from your paycheck. Start small, even if it’s $150. Establish a plan and stick with it,” he says.