We as a country can’t continue to pay for the Social Security, Medicare and Medicaid obligations that we’ve promised our citizens. The math simply isn’t going to work, especially as we enjoy longer life-spans.
When you get right down to it, you are the only one who can provide for your retirement — particularly if you’re under 40. So you can either start saving money now, or face the fact that you may not get to retire.
But if you do want to retire some day, it’s on you more than ever!
Fortunaly, investing and saving for your future doesn’t have to be complicated. Here are 7 strategies to set yourself up for success…
Read more: Clark’s investment guide
Set up automatic withdrawals
Putting your finances on autopilot is downright dangerous when it comes to paying a utility company, a health club, a mortgage lender, a cable provider, a cell provider or any other business. But it’s absolute genius when it comes to investing.
Automatic withdrawals are a great thing when you’re contributing money to a retirement, investment or savings accounts each pay period. People don’t miss the money because they never see it, so it’s much easier to reach your financial goals this way.
Pick up matching 401(k) contributions from your employer
A new report from benefits firm Aon-Hewitt finds that 42% of companies are now offering employees a dollar-for-dollar match in their 401(k). That’s up from 31% of companies asked in 2013. (Prior to 2013, most companies were only doing 50 cents on the dollar.)
Some companies automatically enroll employees in their 401(k) plan. Among those companies, more than half are now setting 4% as the default savings rate.
Four percent is a good start, but it won’t get the job done. If you want a really comfortable retirement, you’re going to need to save at least a dime (10%) out of every dollar you make.
The beauty of an employer match is that it’s the equivalent of an automatic pay raise. No need to ask your boss, get a good quarterly review or hope your company has a good year so there’s money for a raise!
Yet a recent FinancialEngines.com survey finds that one out of every four people don’t pick up the full company match in their company’s retirement savings plan. And that’s effectively like turning down free money — $1,300 on average each year, according to the survey!
Increase your savings rate gradually
It used to be an article of faith that as Americans made more money, they saved more money. But our culture has become one of immediate gratification for everything from houses to cars. Now as our income rises, many of us just spend and borrow more.
A recent report from CNNMoney.com showed that more than one in four American workers has zero savings. Now, this could be a personal choice, or maybe it’s because of a series of circumstances like health woes or divorce. But getting financial breathing room in your life is absolutely essential. Otherwise, you’re one whisker away from financial disaster in the event of a job loss.
Bumping up your savings rate doesn’t have to be a painful thing. Most people find it pretty comfortable to increase their savings rate by 1% every six months. So if you save nothing currently, start by saving 1% of your pay, then increase to 2% in six months. With automatic withdrawals the money is gone before you ever see it!
Maintain a ‘steady as you go’ investing approach
Once you start the habit of saving for retirement, you should automatically put in a set amount of money each month to strengthen the habit and reduce the risk of investing.
By making regular contributions monthly in equal amounts, you are doing what’s called ‘dollar cost averaging.’ That’s just a fancy way of saying you’re not trying to time the market. Dollar cost averaging is a way to pace your investing so that you’re buying shares through thick and thin — when prices are low, high or in between.
In months that the stock market is going down, your money buys more shares. In months that the market is climbing, your money buys a smaller number of shares, but the shares you already own are worth more.
Over time, putting money in this way reduces the possibility you will panic and either sell or stop investing; it keeps you steady as you go. And staying in the game makes you more money over the long haul.
When the Dow Jones Industrial Average dropped to 6,547 on March 9, 2009, a lot of investors had their willpower tested. But people who didn’t sell out and kept putting in their $50 or $100 each month saw big gains on those shares when the Dow surged back. No one knows what the markets will do, but putting in cash every month really cuts your risk.
Don’t tap into your retirement account when you’re unemployed
When hard economic times come, many people take to raiding their retirement savings without fully understanding the repercussions. If you do choose to cash out your 401(k), know that you’ll typically get hit with taxes and penalties that can eat up some 40% of your money.
For example, if you take a 401(k) with $10,000 in it and cash it out, you get a tax bill for 20% upfront. Then when you file your tax return the following year, you get hit with another 20% in taxes and penalties. That means your $10,000 becomes more like $6,000 and you have zero saved for retirement. Very bad math, right?
So you can see why you should never cash out your retirement account when the going gets tough. It should be done only if you’ve absolutely exhausted every other resource and can’t put a roof over your head or food on your family’s table.
Never take a 401(k) check yourself
The average worker no longer spends a lifetime with a single employer. That raises a dilemma when you do leave a job: What to do with your 401(k)? The best strategies are to leave it with the old employer’s plan if it’s with a low-cost investment house like Vanguard, Fidelity, T. Rowe Price of TIAA-Cref, or to roll it over to your new employer’s plan. But recent estimates from Aon-Hewitt suggest that 46% of people spend their 401(k) when they move on from an employer.
If you do need to get at that money — which obviously flies in the face of the advice in the previous tip — there are two smart ways to do it.
First, you can have your 401(k) rolled over to an IRA and draw only what you need to live. By doing this, you reduce the tax and penalties you’ll face. Be sure you’re doing what’s called a ‘trustee to trustee transfer’ when you move the money. That means the money goes from your current plan administrator to your new plan administrator and never enters your hands. You never want to receive a check for it yourself — even if you go ahead and deposit in a new retirement account — unless you want to be eaten alive on taxes and penalties.
If you haven’t lost your job and need cash, you could try borrowing from your 401(k). Now, a lot of people have argued this is a wonderful option because it’s like you’re paying yourself back as you pay back the loan. However, it’s not as great as it seems. You’re paying yourself back with after-tax dollars that will be taxed again during retirement. So you’re effectively being taxed twice instead of only once when the money is spent during retirement. And if you should you leave your employer before you’ve paid back the loan, the balance becomes immediately due in full with tax.
Avoid ‘can’t lose’ investments
The name Bernie Madoff has become instantly recognizable even to those people who don’t know anything about investing. That’s because Madoff operated an infamous $50 billion Ponzi scheme (the largest ever in history), promising his victims ‘the Madoff 10’ — completely safe returns of 10% annually regardless of market conditions.
Madoff wouldn’t divulge the proprietary investing techniques behind ‘the Madoff 10’ during the decades that he was in operation. Why? Because there weren’t any techniques! In classic Ponzi style, early investors were simply paid with money from those who later got on the gravy train.
You’d think after all the Madoff publicity, investors would be wary of Ponzi schemes. But The Orlando Sentinel reports there’s been a 175% increase in the number of investment-fraud complaints in just the last few years, citing numbers from Florida’s attorney general. The FBI concurs with that assessment of the spike in Ponzi scheme activity.
Here’s what you need to know: You should be suspicious anytime you’re told about a method of investing that’s completely ‘safe’ and promises returns that are higher than what the marketplace offers. Usually with a Ponzi, the floor is 10% a month. Maybe that’s why Madoff was able to fly under the radar for so long; he was only promising 10% annually.
Consider this: If the average savings account is paying less than 1%, some ‘opportunity’ promising well above that could easily be a fraud. No one can promise you returns without risk. Beware of the ‘can’t lose’ promises — no matter how small or great they are.
And don’t buy complicated investments that you don’t understand. If you follow this simple rule, you’ll avoid most of the scams out there. If you can’t explain the investment to a fifth grader, don’t buy it!