By Andrew Rombach, LendEDU
Successfully saving for retirement is one of the biggest financial goals to reach and a challenge that can take a lifetime of work to overcome. Experts suggest most people will need about 80% of their pre-retirement income during their retired years, which means a substantial amount of savings over several decades.
With dwindling company-backed pension plans and a shaky future for Social Security, setting aside some of your earnings now makes it easier to achieve retirement at the end of your career – whenever that may be.
Young professionals who are just getting started in their career need to recognize the importance of long-term savings. If you wait, the obstacle to retirement simply grows because there’s less time on your side. Retirement accounts need a chance to grow over time through compounding or investment returns.
If you’re thinking about your financial future and your ability to retire several years from now, here’s how to start saving now.
Learn more about your investment options
There are several ways to save for retirement, and each has advantages and downsides to consider carefully. It pays to do your research on all of them. Learn as much as you can about your options as well as how you prefer to save.
For example, you may lean towards retirement-specific savings or investment vehicles, such as a 401(k) or Individual Retirement Account (IRA). These provide tax advantages that make compounding your investment earnings more fruitful over time, but they come with restrictions on when you can access your savings.
Others may be drawn to non-retirement accounts, like investment accounts or traditional bank or credit union savings. These accounts are more flexible with when and how you can access the money, but they provide no up-front tax benefit for setting aside funds. It’s crucial to understand the types of investment vehicles available to you. There are various account combinations for long-term retirement savings, and some of them carry more risk than others.
Review options provided by your employer
One of the more common ways young professionals can save for retirement is through an employer-sponsored plan. This type of investment account comes in the form of a 401(k) or similar vehicle such as a SIMPLE IRA or SEP IRA. For most of these accounts, you’re able to systematically set aside part of your income for retirement savings. This means your employer withholds a percentage of your paycheck and places it in the retirement account for you.
Your employer may also contribute to your retirement account on your behalf, through contribution matching or voluntary additions. These contributions can make a world of difference in how much you’re able to accumulate for retirement over time. Check with your benefits contact at work to see what retirement plan options are available to you.
It’s pretty clear how helpful employer-sponsored options can be. It could be a perfect way to kickstart your retirement, especially when you consider the ease of integrating your paycheck with retirement accounts.
Manage your current liabilities (e.g. student debt, credit cards, etc.)
It’s challenging to save for a long-term goal when you have monthly debt obligations to pay. Student loans, personal loans, or credit card debt can take up a significant portion of your paycheck each month, so it makes sense to manage these early on in your career. Getting rid of debt can free up money for retirement. Here are a couple of common examples on how to manage different types of debt.
Many young workers struggle to pay off student loan debt. Finding a way to reduce monthly payments could be useful. With established income, you may be eligible for student loan refinancing. Through refinancing, you pay off old loans with a new one provided by a private bank or lender. The end game is to get a loan with a lower interest rate, which may reduce payments and help pay it down faster. You need great credit and established income if you want to consider this, which may be possible in your new career.
If you’re struggling with credit card debt, you could try a similar method as refinancing. With a debt consolidation loan, you can pay off multiple credit cards — leaving you with one loan and a new interest rate. If you can get a lower rate, then you may be able to reduce payments and pay it down more quickly.
Despite all of these credit-based solutions, sometimes the best move is looking at your monthly budget and cutting out inessentials like eating out and entertainment. Reducing your spending is a great way to free up cash for other obligations
Seek out advice
If managing the life retirement plan seems overwhelming, consider help with financial planning. Savings and investment options can be confusing at first, especially if you’re learning on your own.
Pick the brain of a financial advisor or planner while you’re getting started down the retirement savings path. A qualified financial pro can break down your options, run projections, and offer motivation while you work toward your financial goals.
Alternatively, you could try using a robo-advisor to put you on track. These help track your spending, deposits, and investment performance. If you have a general idea on how you’d like to manage your money, a robo-advisor could be a useful tool. It lacks the human element, so it may be best for people who have a general understanding of investing and retirement planning.
Just do it
Whether it’s through an employer-sponsored retirement account or a traditional savings account, start contributing to your retirement fund today! It starts with relegating part of your income to one or two of these accounts. Remember that any bit counts. Even if you have debt, there are ways to fast track repayment or reduce payments, which should help with your savings goals. There’s plenty of advice out there to bank on as well. At the end of the day, you need to make the right decisions with your paycheck.
Andrew Rombach is a Content Associate for LendEDU — a website that helps consumers with their finances. When he’s not working, you can find Andrew hiking hanging with his cats Colby & Tobi, or edge guarding in Super Smash Bros.