As a young professional, you’re thinking about the trajectory of your career, how to balance the needs of your growing family with your career goals, and what the future will be like. But for most young professionals, thoughts of the future too often skip over retirement planning. After all, retirement is so far away that it doesn’t really matter, does it? The truth is that starting your retirement fund early and managing it well can ensure that you live the life you want down the road. If you’re thinking about retirement planning (or even if you’re not) here’s some advice you need to get started.
Making contributions. This is a tricky subject. But if you’re lucky enough to work in a business where the employer matches your 401k funds then you should save enough to max out the limit. If not, the general equation for people under 30 is to spend 75%, save 20% and give 5%. If you’re in a significant amount of debt, or make very little money, you should adjust the ratio to fit your needs. But as your salary increases and your debt decreases, you should revisit the ratio.
Before you decide how to save your money, look at the fees, max out rates, and requirements. If you are saving money in a 401k and you decide to make an early withdrawal for unapproved reasons, it is critical to know what the penalty will be. It is also important to understand the taxes associated with withdrawals and disbursements for when you retire.
Take a look at the rules for employer-sponsored accounts. If your employer offers a no-strings-attached, matched 401k, you’re one of the lucky ones. Most employers have stipulations. For example, some government entities require employees to work five years before their accounts are fully vested. If your employment is terminated for any reason prior to the five year mark, you will lose all employer contributions and the interest associated with those contributions.
Diversified investments. Ever heard the term, “Don’t put all of your eggs in one basket?” The same is true with retirement. Diversification spreads out your assets so that you assume less risk. Imagine if you put all of your retirement funds into just one stock and it tanked? You would lose your nest egg. But if only 10 percent of your funds are in the bad stock, you’ll easily recover. Diversification can take many forms. Many young people choose to diversify through stocks and bonds, but you can also use CDs, savings accounts, and other investment options.
Maxing out. Though some experts say this is not a good idea, it’s unlikely you’ll be able to max out your contributions, especially on a 401k. If you’re under 50, the max is $17,500 per year as of 2013. If you can max it out, go ahead. Or make the choice to diversify.
Retirement planning is not easy. You have to want to understand. But once you make the decision to plan for your future, you’ll never regret it.
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Nigel Craddock blogs for Saga. Saga offer a range of retirement finance services, such as annuities advice and equity release schemes.