Saving for your post-work life probably feels pretty abstract. (What exactly are “golden years,” anyway?) But when it comes to planning, taking the long view is what'll save you from playing a frantic game of catch-up later on.
Ready to get your retirement game on point? Avoid these all-too-common pitfalls.
Even if you have no idea how you’ll be spending your retirement days, you still need to start investing for them—or risk not having enough money when you need it.
The general rule of thumb is to sock away 15 percent of your income annually for retirement, says Erik Carter, senior financial planner at Financial Finesse, though the amount can vary depending on your age and goals.
Think about how much money you’ll need to live on when you stop working, and for how many years, to calculate your total retirement savings goal. Retirement calculators can help you figure out what you need to save each year to get there (5 to 7 percent is a standard return rate to use for calculations on investments).
Even if you can’t afford to hit your target now, the most important thing is to get started.
According to the Bureau of Labor Statistics’ 2015 National Compensation Survey, more than half of employers with a 401(k) plan match a portion of employees’ contributions. If yours is among them, take advantage! It’s free money.
Unfortunately, many don’t.
If you can’t afford to contribute up to the match point today, start small—with a plan to save more each year. Carter notes that many 401(k) plans have automatic escalators that can help you painlessly scale up your contributions annually.
A 2016 LinkedIn report found people who graduated from college between 2001 and 2010 hold an average of three to four different jobs within the first 10 years of working. Translation: You’ve probably racked up a few retirement accounts already.
Bob Gavlak, a Certified Financial Planner with Strategic Wealth Partners, typically recommends rolling old 401(ks) into a traditional Individual Retirement Account (IRA), where you’ll have “more investment options and more flexibility—and if you're managing it yourself, the costs are usually significantly lower.” (Also note that if your 401(k) contains less than $5,000, your employer can elect to cash out your account or force a transfer to an IRA.)
But there are instances where it pays to leave an account where it is. "Sometimes, there are low-fee investment options created specifically for that plan that you can't find elsewhere," Carter says.
Bottom line? Make a plan—whatever that looks like for you—so the money doesn’t fall through the cracks.
Tapping a 401(k) or traditional IRA before age 59½ means you’ll likely pay a 10-percent penalty, on top of ordinary income tax. You can withdraw what you’ve contributed (but not the investment returns) to a Roth IRA without penalty, but you're still blocking yourself from future returns. And while you can take out loans on many 401(k) plans, they come with strict guidelines and repayment conditions.
One notable exception is if you’re buying your first home, in which case you can withdraw up to $10,000 from your IRA without penalty—though you’ll still have to pay taxes. Still, Carter says it’s almost always better to access other money first, since withdrawing money means missing out on investment returns, too, so it’s harder to make up for it later.
Maxing out tax-advantaged retirement accounts is just one way to grow your nest egg. You can save even more for retirement—and other medium-term goals—by setting up automatic transfers to a regular investment account, too.