Financial Planning: Go One Step at a Time
Seriously, you can do this. Here are the basics for retirement planning, boiled down to three steps. Step 2 could take some time, but Step 1 and Step 3 are pretty easy, so get started.
Have you ever tried to build something from scratch without directions?
Recently, I ordered a dresser for my living room online without realizing I would have to put the thing together myself. Unfortunately, I’m not particularly handy — assembling anything more complicated than a turkey sandwich makes me pretty uncomfortable. To make matters worse, the company didn’t include step-by-step instructions.
It didn’t take long to realize I wasn’t up to the task.
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A lot of people feel this way about retirement planning. They don’t have any idea how to get started, so they throw up their hands and it never gets done.
It seems like we see a new scary commercial about retirement every day. With so many experts out there warning us about having enough income to last, you’d think Americans would be better prepared than ever. But we aren’t.
The median working-age couple has saved only $5,000 for retirement, according to a recent analysis of Federal Reserve data, and fewer than half of households are saving inside a qualified retirement account such as a 401(k), where contributions are tax-deductible.
I think a lot of people are just overwhelmed. They hear these experts talk about a million-dollar portfolio as though that’s barely scraping by, and they figure why even bother with their small savings? Or, they’re afraid they’ll lose what little they do have if they invest it the wrong way. Folks often decide they can manage their retirement money just fine by themselves, but they’re busy and never get around to it.
The good news is, it’s never too soon or too late to pull together your financial plan. Here are three steps to get you started:
1. Automate your investments.
Few employers are offering traditional pensions these days. Instead, employees are encouraged to enroll in a 401(k) or some other qualified retirement plan, often with a company “match” (usually 3% to 6%).
Are you making the most of your company’s matching contribution? It’s free money!
If you work for a company that doesn’t offer a 401(k), you can create your own retirement savings account using a traditional or Roth IRA. If your income doesn’t exceed the threshold requirements — eligibility phases out entirely at $133,000 for single filers and $196,000 for married filers —I recommend a Roth. You’ve already paid taxes on the money you contribute, so when you withdraw the funds in retirement (or after you reach the age of 59½ and have had a Roth for at least five years), it’s tax-free.
2. Become debt free.
Student loans, credit cards, car loans and mortgages can drag us deeper and deeper into debt. What if instead of making monthly payments, you were putting the same amount into your retirement savings? Think about how quickly you could build a stress-free nest egg.
Begin by paying off high-interest credit cards, working your way through the bills until your only debt is your mortgage — and then chip away at that. Also, create a rainy-day fund for surprise expenses. Financial experts recommend having enough for three months of expenses on hand if you are married and both spouses are working and six months if you are single or only one spouse works. Personally, I prefer six months or more, but getting started is the first step. Then you can put more money every month into an account that will carry you through a long and healthy retirement.
You never know what your life or the economy will bring down the road, so do your best to have a secure financial foundation in place. Your future self will thank you.
3. Seek out professional guidance.
Sure, you’d expect me to suggest this; after all, I’m a financial adviser. But I truly believe everyone should seek assistance from a qualified professional.
The best way to cut through all the noise is to sit down with someone with the knowledge and experience to help you build your retirement future. Think about it: If your teeth hurt, would you watch YouTube to learn to fix the cavity? Of course not. So why try going solo on something as important as your finances?
Do your research. Talk to at least two or three advisers before making a choice, and treat your first meeting like a job interview. Just remember that you’re the boss; if someone makes you feel uncomfortable or they’re pushy, politely excuse yourself. Also, do a basic credentials check at brokercheck.finra.org and/or advisorinfo.sec.gov.
Financial planning shouldn’t be an overwhelming task. Even if the decisions you make today are baby steps, you’ll be moving in the right direction. And with the help of a trusted adviser, you can get on track for the retirement of your dreams.
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