It's a good idea to plan for something that’s 30 or even 40 years away.
Sure, that may sound strange, but all that time is actually a tremendous opportunity and one you’re obviously going to get only once. So don’t let what's going on in your life today keep you from planning for the future. Here are some things to consider.
How much do you think you’ll need?
We recommend shooting for a portfolio roughly 25 times the amount you plan to spend in your first year of retirement, minus what you expect from other sources of income, such as Social Security. For example, say you plan to spend $80,000 in your first year of retirement ($60,000 from your portfolio and $20,000 from Social Security) and you want a high probability you can keep up with inflation over 30 years. You should plan for a $1.5 million retirement portfolio (25 x $60,000 = $1.5 million).
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Contribute to a 401(k).
You know that big chunk of money the government takes out of your paycheck for taxes? You can make it smaller and save for retirement at the same time with a 401(k). Here’s how it works. The money you contribute to your 401(k) comes out of your paycheck before taxes are calculated, which means you end up paying less in income tax. And the money you put aside in your 401(k) also grows tax-deferred until you take it out. Even better, with many company-sponsored plans, the employer matches a percentage of your contributions. So make sure you at least contribute up to that amount. Why give up free money? If your company doesn’t offer a 401(k), consider opening an IRA instead.
Open an IRA.
While a 401(k) is a great way to save for retirement, it’s not the only way. If you have extra money or you don’t have access to a 401(k), you should open an Individual Retirement Account (IRA). You get to choose the investments you want and your earnings can grow tax-deferred.
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Automatic contributions make it easier.
It’s easier to save when you don’t see the money. By setting up automatic deposits, your account will grow without any more effort from you. Of course, since you never have the money in your hand, you won’t be tempted to spend it. Remember, small amounts add up fast, so starting small is fine as long as you start.
Keep an eye on your accounts.
Tracking your progress from time to time can help keep you motivated. And making adjustments every year will help ensure that you have the right investments for your current situation. Of course, if you ever feel as if you need help, don’t hesitate to ask for it. Regardless of how much money you have, as a Schwab client you can get a complimentary one-on-one consultation to help you get started and stay on track.
