Many people entering the work force in the current economy may find themselves questioning traditional advice as to how to get started with retirement savings. That is of course if they are thinking about retirement savings at all. Hopefully, all young people are thinking ahead as the key to growing your savings is to start early, ideally when you first begin working. While things have certainly changed in the past few years, many financial planners are still recommending basic retirement vehicles to work toward your retirement goals. This includes the 401k. Here we look at tips for setting up a 401k when you are just starting out.
- Understand the importance of starting early. Starting retirement savings in your 20’s may seem a bit early, when you are in your 20’s. After all, it could be hard to imagine the end of your career when you are just starting out, however the early start is what helps your savings grow. When you start as early as possible, preferably with your first paycheck, you have the time on your side, in this case possibly decades for which your savings can grow. By starting at the the very beginning of your career, you tend to not even miss the recommended 10% of your wages that financial planners suggest you put away.
- Automate versus autopilot. There is little doubt that people who set up automatic deposits to their preferred savings vehicle will save more over time. When you have to physically move money from one place to the next, there is a tendency for that money to get lost in the transition. Understand however that just because your savings should be automatic, they shouldn’t be on autopilot. This means that once you establish your 401k, you should pay close attention to where your money is being allocated and what is happening with those investments. Saving for retirement is intended to be a long term investment strategy, however there will be times when you have to make changes to ensure your money is being put to the best use.
- Investigate your options. Retirement plans can be confusing, especially when you are just starting out. Make sure you ask plenty of questions and fully understand the benefits as well as drawbacks of each option. There are several types of 401k, each with their own restrictions and exclusions. It is imperative you understand what your options are as well as the long terms consequences. Knowing the difference between a Roth 401k and a traditional 401k, as well as maximum allowed contributions are the types of things you should be well versed in before making your final decision.
- Avoid debt as you save for retirement. It can be very easy for individuals just starting out to begin saving yet end up owing more money in the long run. While retirement savings are very important, do not cut your budget too short which could result in high interest debt that is counter productive to your long term financial goals.
The economy is never going to remain the same, therefore it is important to know how to invest your money wisely throughout all stages of your life to ensure when the time comes to retire, you have the savings available to live comfortably.