It’s never to soon to start saving for retirement

It’s Never Too Soon to Start Saving for Retirement

Now that you’ve started your first job, you should start saving for retirement.  Be sure to find out the various types of retirement plans that your company offers.  Most common is the 401(k).  This allows you to save money tax-deferred, meaning no taxes are due until you withdraw funds.  If you’re fortunate enough to get a company match for your 401(k), you should contribute at least enough to get the full match (usually 6-8% contribution rate).  Otherwise, you’re leaving ‘free money’ on the table.  The 2014 limit for 401(k) contributions is $17,500 (or $23,000 if you’re age 50 or older).  Bear in mind that your company may choose to limit the percentage of your income that you’re allowed to contribute.
Where you go from there, depends on your personal financial situation.  If you don’t have any liquid savings, now is the time to establish an emergency fund.  I would recommend $1000, or one month’s living expenses, whichever is created.   These funds are not to be touched unless you have a true emergency, i.e. unexpected medical expenses, job loss, etc.
After you have an emergency fund in place, you should work to get rid of any high-interest debt such as credit card debt.  Historically, the stock market has an annualized return of 8% so you’re losing money if you invest to get 8% while paying interest of 10% or more.
Once your debt has been eliminated, consider investing in an IRA.  There are two types – traditional or Roth.  Traditional IRA contributions may be tax-deductible depending on your income.  However, the amount that is tax-deductible may be capped if you are eligible for a retirement plan, such as a 401(k), though work.  If your contributions are not tax-deductible (which is generally the case starting at $70,000 modified adjusted income), invest in a Roth IRA.  For 2014, the maximum amount that may be contributed to any IRA is the smaller of $5500 ($6,500 if you’re age 50 or older), or your taxable compensation for the year.  However, it’s not too late to make a contribution for 2013.  You have until April 15, 2014 to do so.
If you have funds to invest after maxing out an IRA, consider increasing the percentage you contribute to your 401(k).  In addition to improving your nest egg, this will also reduce your tax liability as your taxable income will be less than if you weren’t contributing.
Regardless of the type of investment account you choose, you should make sure you have a diversified portfolio.  This means investing in more than one type of asset class such as stocks vs. bonds, domestic vs. international, small cap vs. large cap.  The most simple way to accomplish this is to consider target date funds (based on your estimated retirement date) or index funds. In addition, it’s important to consider the expense ratio when comparing investments.  This is the percentage of the fund’s assets (and accordingly your investment) that goes toward the expense of running the fund.  Simply put, this is a fee that comes out of your investment and lowers your returns.  Therefore, all other things being equal, it’s best to choose the investment with the lowers expense ratio.

In a nutshell, if you follow these four steps, you will be well on your way to ensuring a financially comfortable retirement when the time comes.

If you need help getting started get in touch with Stephanie at www.s2fc.com.

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