New investors often ask when the best time is to start saving for retirement. The answer is that everyone should start saving as soon as possible, as soon as when you have your first job out of college. While this may discourage older investors, it is never too late to start saving. The basic precepts of investment state that putting money in early means that your investments will grow over time through compound interest. Ram Lee, partner at Seven Bridges Advisors, a registered investment adviser in New York City, provides these tips for investors who are beginning their retirement savings journey.
1. Start as Soon as Possible
It is never too early to start saving for retirement. Putting a small amount of money into retirement accounts early on can lead to great returns down the road. When you are in your twenties, it is smart to be more aggressive with your investment strategy. It is also smart to start saving in your twenties because you may not yet have a mortgage or a family. It is easier to get in good habits of saving money, and you will be able to keep your investment’s long-term prospects strong. Getting accustomed to having some money in the bank, as a cushion for monthly expenses, rather than spending it all every month, is one of the most important habits to form.
2. Use Your Employer’s 401(k)
It is smart to take advantage of an employer’s 401(k) program. This plan means that the money saved is deposited in the account on a pretax basis. This is effectively a tax break from the government, though you will have to pay taxes on the money when it is withdrawn at retirement. The 401(k) is often matched by your employer as well, which is a source of free money.
While a 401(k) can be borrowed from over time and repaid to yourself with interest, it is wiser to keep your money in the 401(k) and to put other funds into more short-term investments. Find out each year what the maximum you can contribute to your 401(k) program and see if you somehow make it work to put in that maximum amount. Since it will be going in pre-tax, the actual amount your paycheck will appear to drop (because the money is going into your retirement account) will be less than the amount you are able to save in the 401(k).
3. Roth IRA as an Alternative to the 401(k)
If your employer does not offer a 401(k), it is wise to invest on a Roth IRA. When you fund a Roth IRA, you will pay taxes on the money up front, but you will not need to pay them when you withdraw the money at retirement. This presents an excellent opportunity for people who cannot invest in a 401(k). It should be considered by everyone since it has different advantages than other investment funds.
4. Change Your Strategy as You Age
As you age, it is wise to adjust your investment strategy. While you can make high-risk investments in your twenties and thirties, you should start pulling back in your forties. Start investing in bonds, CDs, and other less volatile forms of investment. Each quarter, it is wise to examine your investment strategy and to make any necessary changes. In addition, having some short-term investments, like CD’s, allows for reinvesting as interest rates change, rather than locking in interest rates in longer term bonds. A qualified financial advisor will be able to help you adjust your investment mix as your assets, risk tolerance, and cashflow needs change.
5. Make Sure to Build an Emergency Fund
This is good advice for investors of all ages. Saving money is a good habit for everyone, and you should aim to have six months of daily expenses in your account to cover any financial emergencies that may come up. Too many people live paycheck-to-paycheck and rely on their credit cards for daily expenses. This is a dangerous strategy and can lead to financial problems down the road.
To make your investment automatic, have your money directly deposited into a high-yield savings account. This will help your money work for you even when it is placed in a more liquid investment.
6. Don’t Rely on Social Security and Pensions
Many younger employees may have the mistaken belief that they will be able to survive on Social Security and pension funds after they retire. In fact, seniors who rely on Social Security alone are often living at or below the poverty line. With such a small monthly check from the government, it makes sense that some older Americans have moved in with family members to make ends meet. Building a strong investment portfolio will set you up for the future, when you may have greater health care and long-term care expenses.
7. Invest at a Young Age When Possible
It is best to start investing when you are still in your twenties, but it is never too late. Using lower-risk strategies, older investors can make enough money to provide funds for themselves in retirement. Ram Lee encourages all investors to look into retirement savings, making sure that they will be well provided-for in their golden years.
