Imagine yourself at your farewell party as you leave full-time employment and head into retirement. If, on that day, you were to create a line graph representing your retirement savings efforts over the course of your career, that line should tell the story of your life.
For all the preaching I do about saving for retirement, I know that life happens. Financial lifecycles tend to reflect the other parts of our lives. And you know what? It’s OK. Here are some tips you can use to adjust your retirement strategy as you navigate what life throws at you.
1. When you start working, begin contributing to your retirement plan as soon as possible. It’s easy to say you’ll start putting money away at some arbitrary date in the future or when you reach some random salary level, but the truth is that the earlier you start saving, the easier it will be. Starting early makes saving easier because of compound interest (your interest earning interest), a powerful financial concept not to be taken lightly. Also, we’re all human and most of us are susceptible to the pull of inertia. Life can get in the way of doing the right thing until suddenly you turn around, five years will have passed and you still haven’t started saving.
2. When you earn a bonus at work, put some of it aside for your retirement. You might consider an IRA or Roth IRA if applicable to your situation. You don’t have to put your entire bonus toward retirement (although you may thank yourself later if you do).
3. Don’t use your retirement money to pay for anything else but your retirement. When you buy a house or car, or if you have college bills, resist the temptation to take a loan from your retirement plan to cover those expenses. Yes, the money is sitting there, and yes, your company may allow you to borrow from it, but that doesn't mean taking a loan is a good idea. For one thing, you will lose out on compound interest from the money you take and you will pay back your loan with after-tax dollars. And if you leave your employer while you have the outstanding loan, you may be on the hook to pay the entire amount back at once or else suffer unwelcome taxes and penalties.
4. As you earn more money, increase the amount you save for retirement. Many investment advisers suggest saving 10-15 percent of income for retirement purposes. You may not be able to save that much right away, but you can plan to increase your savings by a percent or two each year until you reach the 15 percent goal.
5. Don’t “set it and forget it.” Sure, you have a lot going on with work, family, friends and community obligations; however, your retirement is your responsibility. Take time to review the account statements prepared for you each quarter—don’t let life get in the way of doing the right thing for your retirement future. Evaluate the amount you’re saving and determine if it will get you to where you want to be by retirement age. If it won’t, work out steps you can take to help you reach your goals. Also, check that the investments you are using are appropriate for your needs and reallocate periodically so you don’t take on more risk than you should.
6. Avoid early withdrawals from your account. If you stop working before retirement age because of a layoff, raising children or health concerns, look for alternative ways to stay afloat. No one can say what Social Security will look like in 20 years and many companies are moving away from pensions. Your retirement savings may be the main source of income you’ll depend on in later years, so don’t deplete it unnecessarily.
7. When you reach age 50, take advantage of the catch-up contribution feature. Investors age 50-plus can contribute an extra amount toward retirement than when they were younger, so you can make up for some of the times when you weren't able to save as much.
If you look back at the ups and downs of your retirement savings on a chart someday, you should be able to recognize the events that shaped your contribution levels and account balance shifts. From contribution rate changes to account withdrawals, your retirement strategy reflects what’s going on in the rest of your life.
As long as you’re being strategic, it’s OK. Savvy retirement investors are:
Retirement planning is a part of life, or at least it should be, no matter—and perhaps because of—what life throws at you.
Scott Holsopple is the president and CEO of Smart401k, offering easy-to-use, cost-effective 401(k) advice and solutions for the everyday investor. His advice has been featured on various news outlets, including FOX Business, USA Today and The Wall Street Journal.