Regardless of your income, saving for retirement is an important endeavor that you should carefully plan for now instead of later. Time, as they say, (mostly) is on your side and it is never too late to begin saving for it.
If there is one universal lesson to be learned from reading this story, that is it, say local financial advisers Jim Sandager and Norm Wright whom we interviewed to discuss ways to save for retirement. That, of course, and to seek the advice of a professional adviser. Find someone who you can trust and who understands your values and goals.
Money is a means to an end, and the end is to feel like you have lived out your core values in life,” says Sandager, senior vice president and financial adviser with Wealth Enhancement Group in West Des Moines. “Your core values might include family, health, stability and honesty. They are what’s important to you, and how you live your life is how you earn and spend your money. So we help people understand their values, goals and decisions to achieve the results they want.”
Wright, president and financial adviser for SKC Financial Group in West Des Moines, says that while each client is unique, there are a few basic strategies to employ when beginning to save for retirement. They include identifying your financial needs for retirement, paying off credit card debt, establishing an emergency fund, enrolling in your employer’s retirement savings plan such as a 401(k) or opening a traditional or Roth individual retirement account (IRA) for those whose company does not offer a retirement savings plan or who might be self-employed.
“We talk about those things not only in terms of saving for retirement, but for helping them achieve financial success if they might also want to help pay for their child’s college education, or take a big vacation, or leave money for their family,” says Wright. “The first step is talking to a financial adviser and establishing a plan and begin following it.”
Paying off your credit card debt, for example, yields dividends. Wright says 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 agree that reducing credit card debt is possible if you rein in your spending and use your credit cards wisely.
“I see people making $40,000 and $300,000 who have the same problem with credit card debt,” he says. “The problem is they don’t know how to control their spending. I see people who drive a fancy car or buy a big house and you assume that they are doing better than you are, but they have maxed out their credit to keep up with the Joneses.
“You have to be smart about using your credit cards and use them the way they were meant to be used. Keep a credit card on hand, and use it sparingly maybe for one thing and pay it off to maintain a good credit score. You want to establish good habits.”
After that, experts say, start saving money for an emergency fund. Three to six months worth of salary is generally recommended, but if your company has experienced layoffs or is in poor financial shape, you might want to save the equivalent of six to nine months in earnings.
“This money could be used for anything down the road, but you should have some reserves so that if you lost your job tomorrow you could pay your bills while you find another job,” Wright says. “We tell people to strive for saving 15 percent of your annual salary, before or after taxes, as a benchmark. That money can be allocated in a variety of ways, including saving for retirement.”
Saving money is easier than ever before, financial advisers say. The easiest way to save is to electronically transfer a portion of your paycheck directly into a savings account.
“If you don’t see that money in your checking account, you don’t miss it,” Wright says. “Sometimes we even encourage clients to open a separate savings account at another bank so that they are not tempted to spend their savings.”
Wright says don’t wait until you pay off your credit card debt or establish a comfortable savings nest before you begin to take advantage of enrolling in your employer’s retirement savings plan such as a 401(k). He says to contribute the maximum to which your employer will offer a match, calling it “free money.”
“It’s one of the easiest and best ways to save for retirement. Some employers also offer 457 plans or certain IRAs. Take advantage of them,” he says. “If your employer doesn’t offer a 401(k), open a Roth IRA.”
Wright says more people are learning about tax-deferred Roth IRAs. He reminds them not to cash out their 401(k) savings plans if they leave a job and take another one that does not offer a similar plan. Instead, they should roll over their savings into an IRA.
Those under 50 can now contribute up to $5,500 compared to $5,000 last year for an IRA and Roth IRA. Investors can also add another $1,000 to the account if they are more than 50 years old as part of a new “Catch Up” provision for IRAs, too.
“I don’t think people have heard of them as much, but they are a better tax vehicle,” he says.
Sandager says finding the right tools to save for retirement is important. Gone, for the most part, are the days of employee pensions, and not every employer offers retirement savings plans. Though he believes Social Security will continue to survive for many years to come, it likely will not provide enough income for retirees to solely rely upon for their income.
“I tell clients that Social Security is a base, and you have to build upon that,” he says. “Before they retire, it is our job to help them stay focused on accumulating wealth at a fast rate so that they have a nest egg big enough that they can determine what appropriate rate they need to save for to retire comfortably. Once you’re retired, you want to maximize your after-taxes income.”
Sandager says every client has a different view of what it means to “retire comfortably,” though everyone shares the top goal of establishing financial security. One of the common mistakes people make, he says, is that they are content with living on an annual income that is 70 or 80 percent of what they earned before they retired.
“My clients want 100 percent of what they had before they retired,” he says. “We encourage them not to settle for less.”
After that, they can determine how they spend their money. Sandager, whose company employs a team of financial specialists, says he has learned that most of his retired clients are willing to spend more money on others rather than themselves.
“Maybe they want to take the family on a cruise, or help pay for a grandchild’s education because it’s what their values are,” he says. “You have to relate your values to your goals.”
Sandager refers to a money matrix, which helps clients better understand their values and goals for retirement. It includes personal, tax preferred and tax advantaged savings and how much (if any) of them to invest in short (up to seven years), middle (seven to 15 years) and long term (more than 15 years) savings planning.
“It’s like having different buckets to put your money into and diversifying your investments,” he says. “The tools include personal savings, 401(k), IRAs and Roth IRAs and knowing when you need the money.”
The younger you start planning, the better, experts say.
“Someone in their 40s should understand that every expense distracts from their retirement. They might decide to buy a big house and retire at age 70 instead of 62. The key is to have enough principle in place for retirement,” Sandager says.
Wright says even those who want to save money to spend on others, whether it is a vacation or a child’s education, need to be reminded to save for their retirement first.
“I applaud those who want to pay for their child’s education, but they have to remember that they can borrow for an education but they can’t borrow for retirement,” he says. “Make sure your retirement is on track before you save for college.”
Wright also cautions those in their 40s and 50s not too become too obsessed with paying off their mortgage at the risk of not saving for retirement.
“They get brainwashed sometimes into doing that, but they need to strike a balance between their expenses and their savings,” he says. “Get help from a professional who can put you on the right track.
“It’s never too late to start planning. Some people come into my office and admit that they are embarrassed that they haven’t started saving for retirement. We’re not here to judge anybody. We want them to get into a habit of saving something, even if they start small. It’s just a matter of getting started.”
Finally, Sandager also reminds people not to get startled by sweeping media headlines designed to scare investors.
“They cause unnecessary anxiety. Stay away from them and talk to an adviser who can help remove the emotions from important financial decisions,” he says.