When it comes to retiring, your grandparents had it easy. They had pension plans and Social Security, and it was all done for them. Now, pensionsâ€”and perhaps Social Securityâ€”may be a thing of the past. On top of that, rising Medicare costs and inflation make saving for retirement when youâ€™re young more important than ever.
The good news is that there are several ways to save. And as it turns out, itâ€™s pretty damn easy.
But where do you start? Any financial planner (or nagging parent) will stress your need to set up a budget. Erin Tait, 22,a cook from Lincoln Park, says she puts one-half of every other paycheck in her savings account, and the rest goes in her checking account. â€œIâ€™m young,â€ she says. â€œI just got out of school. Iâ€™ve never really thought about creating a budget before.â€
And it turns out Taitâ€™s on the right trackâ€”saving starts with your paycheck. â€œYou have to have money going into a savings account or a retirement plan, something that happens immediately upon getting paid,â€ says Brent Rosen, a financial planner with Bannockburn, Ill.-based GCG Financial, Inc. â€œItâ€™s important you get a grasp of where your money is going on a monthly basis.â€
If credit card or student loan debt is on your mind, itâ€™s still possible to save for your retirement. (Just pay off those high-interest credit cards first.) Stuart Ritter, assistant vice president of Baltimore-based T. Rowe Price Investment Services, recommends you start saving as soon as you get out of school. â€œIf you start right as youâ€™re coming out of college, you only need to save 10 percent of your salary until you retire at age 65,â€ he explains. â€œ Thatâ€™s not muchâ€” some people are spending more than that on their monthly cell phone bill. If you wait until youâ€™re 35, you need to save 18 percent of your salary. [By waiting], youâ€™re doubling
the amount you need to save.â€
A 401(k) is a good start. If your employer offers 401(k) accounts, you can have pre-tax money taken out of your paycheck and put in an account toward retirement. Better yet, many companies will match the money you put inâ€”up to a point, which is usually about a six percent contribution. â€œAlways put enough in to get the matchâ€”itâ€™s free money,â€ Rosen says. â€œ Thereâ€™s no mutual fund in the world that will give you a 100 percent return.â€
Another good option is to tuck away some extra money in an IRA . (It stands for Individual Retirement Account, and itâ€™s essentially a bank account you donâ€™t crack open until you retire.) There are two types: traditional and Roth. A Roth IRA is probably what youâ€™re going for, since you likely make less than $101,000 or $169,000 if youâ€™re marriedâ€”the current income limit for Roth contributorsâ€”and itâ€™s recommended for most people, since the money you contribute is taken out after taxes, so you donâ€™t get taxed again when you retire.
With IRAs and 401(k)s, youâ€™ll find you can choose from a mix of short- and long-term stocks, bonds and mutual funds. (If you own stock, you own a share of a company; a bond is essentially a loan the company agrees to pay you back.) If youâ€™re young, your best bet is to put your money in stocks. â€œ[When you graduate college], youâ€™ll be investing for 30 to 40 years, so the price of whatever you want to buy will [hopefully] have gone up a lot by the time you retire,â€ Ritter says.
If thinking long-term is out of the question, Ritter suggests you try saving for three months. â€œGo to your employer, get the 401(k) forms, and contribute 10 percent of your paycheck to a 401(k). Live your life for three months,â€ he says. â€œ The rest of your budget will have adjusted and you wonâ€™t miss your money. If you canâ€™t do that initially, save enough to get the match and increase the amount you save by two percent every time you get a raise. Donâ€™t overestimate how difficult it is to save.â€