Senior vice president of retirement and income solutions, Principal
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If you could go back 30 years and give yourself one piece of advice regarding retirement planning, what would you say?
I was recently involved in a research project and asked a group of retirees that exact question. The most common answer? "Save more and start saving earlier." Below is a list of some of the most common strategies that they and other experts recommend to make that happen.
Save 10%. No two people or financial goals are alike. However, as a general rule of thumb, saving 10% of your income will help provide the money you'll need to live tomorrow.
Participate in Your Employer's 401(k). Maybe a better financial tip title for this would have been, "Take the free money!" But seriously. If you are eligible to participate in a 401(k) plan, participate now. (The 10% savings tip listed above works here!) Or, at the very least, take full advantage of any match your employer provides. Even though we have almost become tone deaf to the statement "FREE MONEY," it really is FREE MONEY. Take it!
Establish an IRA Early On. IRAs allow you to invest your money and let it grow tax-deferred, and in some cases, tax-free. (Hear that? It's that word "free" again!) IRAs can also be a very convenient vehicle to consolidate and manage your retirement savings and keep your 10% savings goal as you change jobs.
Save More Through Stock Purchase Programs or Mutual Funds. Take advantage of companies and mutual funds that allow you to contribute small amounts directly out of your checking account on a monthly basis. These "set it and forget it" strategies will help assure you save and invest on a regular basis. For more experienced investors, some companies, like the Walt Disney Company, allow you to purchase their stock directly and in small amounts (note that I'm not recommending or endorsing the purchase of Disney stock).
Calculate Your Specific Target. While saving 10% of your income is a good rule of thumb, it's important to figure out your own optimal target. This is driven by a number of factors including age, income growth prospects, current resources and debts and timeline. Industry experts often recommend generating 70%-85% of your current income while you are in retirement. Utilize one of the many online retirement calculators to determine a more precise savings number.
You Can't Touch This (Money)! Well, you can, but you might not want to. Whether in a 401(k), IRA or other long-term savings account, don't treat these accounts like checkbooks or cheap ways to "borrow money from yourself." Resist the temptation. This money has only one goal--to fund your basic needs and wants after your paycheck is turned "off." Don't spend it while you still are receiving a paycheck.
Be Smart About Your Mortgage. Understand how a mortgage works. Calculate how much home you can afford and put together a plan to pay off your mortgage as quickly as possible. In the early years of your mortgage, your payments are mostly being applied to pay interest. Refinancing to make your payment lower is not necessarily a good strategy. If you were to refinance a 30-year loan to another 30-year loan three years after you take out the first loan, you'll essentially be going back to the starting line to try reaching that principal balance again. Instead, focus on a strategy that will result in you paying less total interest over the life of the loan and enable you to pay off the principal fastest.
Work with a Trusted Advisor. Seeking professional financial help early on can prevent a lot of grief down the road. You may not think you have enough money to use an advisor today, but good advisors are in it for the long haul. And that includes serving clients of all ages.
For Millennials, this post might be worthy of a refrigerator magnet or a permanent place at your desk. For parents of Millennials, this is probably a list worth sharing. Because great financial tips never go out of style.