I’m in my late 20s and am behind in preparing for retirement. What’s the best way to catch up? — Taylor, Winston Salem, N.C
I’m happy to see someone so young so concerned about planning for retirement. But let’s not get carried away here. If you’re still in your 20s, it’s hard to imagine that you could have fallen very far behind.
You’re at the beginning of your career, which means you’ve got a good 35 to 40 years of working, saving and investing ahead of you. So even if you’ve done nada to date, there’s no reason to panic.
That said, you don’t want to put this off any longer, and the best way to get started is to realize from the get-go that the single best way to assure yourself a comfortable retirement is to save as much as you can on a regular basis.
That’s true whether you’re behind and trying to get back on track, or if you’re already on course and want to stay there.
Unfortunately, a lot of people are under the mistaken impression that smart investing is the surest route to retirement security. I suspect that’s because the financial press spends so much time obsessing about the markets and giving the impression that you can easily boost your returns by deftly shifting your money around.
If only it were so. But the fact is that while investing is certainly important, increasing the amount you save is a much more effective method of improving your retirement prospects.
Speaking of saving, it just so happens that the U.S. Senate has designated this week as National Save For Retirement Week. If you’re into florid legislative language with “whereas this” and “resolved that,” you can take a look at the actual resolution. But if you prefer to do something more practical to jump start your retirement planning, I suggest you do the following.
First, get a handle on how much you should be salting away each year. With retirement still so far off there’s no way to know precisely how much you need to set aside. But you want to at least arrive at a ballpark figure.
When you’re further along in your career, try a more robust retirement calculator that allows you to get a more customized assessment of whether you’re saving enough, how your savings are invested, how much you expect to collect in Social Security and pensions and your planned retirement age. For now, though, a rough estimate is just fine.
Next, make sure you’re taking full advantage of tax-advantaged savings options, as mitigating the tax bite can leverage your savings effort and help you build a larger nest egg. Fortunately, this is a message that appears to be getting through. When asked to identify the best retirement-savings vehicles as part of a recent Wells Fargo Retirement Fitness Survey, 71% of the 1,000 people polled named a 401(k) or IRA.
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Clearly, the 401(k) allows you to put away more bucks — a max of $17,500 next year, plus a $5,500 catch-up contribution for anyone 50 or older — plus it has the advantage of automatic payroll deductions and, in most cases, employer matching funds.
But with a current annual max of $5,000 plus a $1,000 catch up, the IRA can also be a powerful savings tool — and you may even be able to do both. If you can still afford to save after maxing out your 401(k) and an IRA, you can move on to tax-efficient vehicles like index funds, ETFs and tax-managed funds.
Once you’ve got the savings side of the equation covered, you can focus on investing. But your aim here isn’t to stuff your retirement accounts with every investment the marketing gurus on Wall Street can come up with. Rather, you just want to create a basic diversified portfolio of stocks and bonds, keep costs low and rebalance once a year so your portfolio doesn’t get too stock-heavy during bull markets or overweighted in bondsshould stocks take a tumble.
Bottom line: You’ve still got plenty of time to bulk up your nest egg, and if you follow the plan I’ve outlined, you should have no trouble doing so. But make sure you started now because if you wait too long you really will fall behind.