Your early working years are the most crucial time to develop strong retirement saving habits and to take advantage of the long-term compounding power you have. With that in mind, here are some retirement savings rules for twenty-somethings that could help you get started on the path to a secure retirement.
1. Don’t be afraid of the stock market
One common mistake that many younger investors make is avoiding the stock market. In fact, in a recent Bankrate survey, fewer than one-fourth of millennials said stocks are the best place to invest money. Their top choice? Thirty percent said cash is the best place to put savings. Stocks are surprisingly predictable over longer periods. The market has historically returned an average of about 10% per year. There is simply no better passive long-term wealth creator. To put this return rate in perspective, let's say you're 25 and begin investing $5,000 per year in stocks. Assuming a long-term 10% annualized return, you could have $2.2 million by the time you're ready to retire at 65.
2. Know the best tax strategy for you
Here’s a short a primer on IRAs and their tax treatment. There are two different types of individual retirement accounts, or IRAs, available to most people -- traditional and Roth. And the key difference is the tax benefits of each.
A traditional IRA is a tax-deferred account. That means qualified individuals get a current-year tax deduction for their contributions and don't pay any dividend or capital-gains taxes while their money is in the account, but eventual withdrawals will be treated as taxable income.
On the other hand, a Roth IRA is a tax-exempt account. You won't get a deduction for your contributions, but your eventual qualifying withdrawals from the account will be 100% tax-free.
Here's the point. Contributing to a traditional IRA makes the most sense if you're in a relatively high tax bracket now. Contributing to a Roth IRA makes the most sense if you're in a lower tax bracket now, as most people who are just getting started in their careers are.
3. If you have a 401(k) take full advantage of your employer’s match
About 20% of workers whose employers are willing to match some of their 401(k) contributions don't take full advantage of this benefit.
Younger workers are especially susceptible, and here's why. While employer matching programs vary significantly, many match employer contributions of up to 4%-6% of total salary. However, more and more employers are auto-enrolling their workers in their plans. The problem is that the automatic contribution rate is often low -- just 2% or so.
Here's the rule. At a bare minimum, you should be contributing enough to your 401(k) to take full advantage of your employer's matching program. Not doing so is literally refusing free money. In other words, if you earn $50,000 and your employer will match contributions up to 5% of your salary ($2,500), but you contribute only 2% ($1,000), you're missing out on $1,500 each year.
(Matthew Frankel, CFP;The Motley Crew, 8.1.18)
For more information on retirement options, contact Stevie Swain at Swain Consulting, LLC at 513-818-1753 ext 4.