Retirement is the biggest expense you'll ever save for, and it takes 30 to 40 years in the workforce to do it. It's a challenge for most people, but the sooner you get started, the easier it will be. Here are four moves you should make today to give yourself the best shot at a comfortable retirement.
Create a retirement plan
Without a concrete retirement plan, it's likely you will underestimate how much money you actually need, and this could cause you to run short in your final years. Start by estimating your life expectancy, and figure high. One in four 65-year-olds today will live past 90, and one in 10 will live past 95, according to the Social Security Administration. Subtract the age at which you plan to retire to estimate the length of your retirement.
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Next, calculate your estimated annual living expenses in retirement. Don't forget about housing, utilities, groceries, insurance, healthcare, and taxes. Add these up and multiply them by the number of years of your retirement, adding 3% annually for inflation. A retirement calculator can take care of that for you. It should give you the total amount you need to save and how much to save monthly to hit your goal. This depends on your estimated investment rate of return. You can use 7% to 8%, or 5% to 6% if you want to be conservative.
Subtract from your total estimated retirement costs any amount you expect to receive from an employer 401(k) match, a pension, or Social Security. You can estimate your Social Security benefit by creating a My Social Security account. The remainder is the amount that you must save on your own for retirement.
Open retirement accounts, if you don't have any
If your employer offers a 401(k), this is a good place to begin saving, especially if your company matches a portion of your contributions. Most 401(k)s are tax-deferred, so your contributions reduce your taxable income this year, but you pay taxes on your distributions in retirement. Roth 401(k)s are becoming more popular, though. You pay taxes on your contributions to these accounts this year, but then you don't owe taxes on your retirement distributions. You may contribute up to $19,000 to a 401(k) in 2019 or $25,000 if you're 50 or older.
An IRA is another option if your employer doesn't offer a 401(k) or if your 401(k) charges high fees (more on that below). You can choose between traditional or Roth IRAs, or have one of each. Traditional IRAs are tax-deferred, while Roth IRAs work in a similar way to Roth 401(k)s. You can only contribute up to $6,000 to an IRA in 2019 or $7,000 if you're 50 or older, but IRAs offer more flexible investment options and they typically have lower administrative costs, so some people prefer them to 401(k)s.
Check how much you're paying in fees
All retirement accounts charge fees to cover things like record-keeping and special services like 401(k) rollovers. You may also pay fees when you buy or sell an asset, and some investments, like mutual funds, charge shareholders an annual fee, known as an expense ratio. You don't realize you're paying any of these fees because they come directly out of your accounts, but they add up quickly and can eat into your profits.
You can check with your plan administrator or your company's HR department if you're not sure how much you're paying in retirement account fees. You can also check your plan summary or the prospectus for your investments. But you shouldn't pay more than 1% of your assets in fees each year. This is more of an issue for 401(k)s, especially with smaller companies because the administrative costs are divided among fewer employees. If you're paying more than you want to, talk to your employer about offering more low-cost investments, like index funds. These are mutual funds that passively track a market index, and they're known for delivering consistent returns for a low fee. If your employer refuses, consider moving your money to an IRA unless your employer 401(k) match covers what you're paying in fees.
Boost your contributions
When you created your retirement plan, you should have figured out how much you need to save each month to hit your goal. Aim to save at least this much if you can. But if your budget won't allow for that right now, just save as much as you can and try to increase your contributions by 1% of your salary per year until you hit your goal. Take advantage of any employer 401(k) match that's offered unless you absolutely cannot spare the cash. It's free money, after all.
If you want a relaxing retirement, you have to take steps to prepare for it now. Use the four tips listed above to get started and then reevaluate your retirement plan once every year or two to ensure that you're still on track.
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