RETIREMENT PLANNING: THE INITIAL HURDLE IS TAKING THE FIRST STEP

RETIREMENT PLANNING: THE INITIAL HURDLE IS TAKING THE FIRST STEP

We all procrastinate—some more than others. I get that in your twenties or even thirties, saving for retirement can seem so far off that it’s hard to feel any urgency. But that’s a big mistake!

Here’s Why

Saving 50% of your income isn’t realistic for most people. But essentially, that’s what you’d need to do if you relied solely on a savings account for retirement. The interest from a typical savings account is barely noticeable. Investing, however, is the key to a comfortable retirement. Investments like stocks, 401ks, mutual funds, and IRAs offer much higher returns than a savings account, allowing you to invest less of your income while achieving better results.

But There’s a Catch

Investments in stocks, mutual funds, ETFs, and REITs carry more risk than a simple savings account. But with higher risks come higher rewards. The best way to manage this risk is to start planning for retirement early. Beginning early gives you the advantage of time, so if you make mistakes, you have years to recover. If you start late, you’ll need to invest more conservatively, reducing your chances of seeing the large gains that higher-risk investments can provide.

I Don’t Have Enough Money

That’s just another excuse! The amount you have to invest is less important than just getting started. Even small contributions early on can help you build the habit of investing, which is crucial throughout your working life. You can open an online account with as little as $500.

Seek Every Advantage

No one knows everything about investing, so keep learning. Read as much as you can because knowledge is power in investing. Stick to investments you understand while you’re learning. Starting early means you can grow your knowledge along with your portfolio. If your company offers a 401k with an employer match, contribute at least enough to get the match—it’s free money you’d otherwise leave on the table.

Income taxes are another important factor in retirement planning. Understand the tax implications of your investments. Use IRAs to defer income taxes until retirement when you’ll likely be in a lower tax bracket. While it’s smart to consider taxes, don’t let that focus prevent you from taking advantage of good investment opportunities. Remember that today’s tax code might not be the same in the future.

Risk

Balancing risk and reward is crucial. Accept that not all your investments will perform as expected. Always consider the downside risk and decide if you’re financially comfortable with it.

For those who find calculating returns challenging, the rule of 72 can help. This rule helps you estimate how long it will take for your investment to double. You just need to know the annual rate of return. Even without a fixed rate, you can use an average yield for a good estimate. For example, with an annual yield of 6%, your investment will double in about 12 years (72 ÷ 6). This simple calculation is a valuable tool for making investment decisions.

To wrap up: start early, even if you start small. Keep learning because knowledge is power. Invest in what you understand. Accept losses and don’t risk more than you can afford to lose. Be cautious but not overly timid. Time is on your side, so don’t procrastinate!