Where to Begin Saving for Retirement

​Retirement is one of life’s constants. Setting aside enough savings in your working years will ensure you have adequate income to live off in retirement. 

So, how do you start saving for retirement? The first step is meeting with a retirement planning professional. This is a financial advisor who has the knowledge and competence necessary to create a retirement plan for you. They also help you execute the plan. 

A retirement planning professional will initially want to know details about you. These include your age, monthly income, monthly expenses, assets, and liabilities. This information will help them understand your current financial position. 

Next, they will inquire about your future retirement goals. You may fancy an active retirement where you travel the world and engage in your hobbies regularly or prefer a quiet, relaxed retirement. Perhaps you just want to maintain your current standard of living in retirement. Each case will require different retirement income levels. 

Given your age, financial position, and retirement goals, the advisor will recommend an amount to save up so as to live comfortably in your golden years. The advisor will also factor in expenses you may not be cognizant of, like medical expenses in old age. If you only withdraw the recommended percentage from this amount annually, say 4 percent, you will have enough to meet your needs. 

Once you have a dollar amount to work toward, the advisor will recommend an amount of money to save every month toward your retirement goals. This will align with your monthly cash flow needs. If your expenses are too high, the advisor will even recommend ways to budget better so that you can save for retirement. 

Choosing an appropriate retirement investment vehicle is the next step. Americans have several tax-advantaged retirement investment channels to choose from. The major ones are individual retirement accounts (IRAs) and 401(k)s. 

There are two types of IRAs: traditional IRAs and Roth IRAs. Contributions to traditional IRAs are tax deductible, and once money is invested, it grows tax-deferred. A person can withdraw the money after the age of 59.5 years. Withdrawals are taxed as ordinary income. Early withdrawals can trigger penalties. 

Contributions to Roth IRAs are not tax deductible. Once invested, the money grows tax-free. A person can withdraw from age 59.5 years tax-free. 

There are contribution limits for both types of IRAs. A retirement planner will guide you on these, as well as withdrawal rules and minimum distributions. 

The other popular retirement vehicle, 401(k), is available to people who obtain their income from an employer. Once you enroll in a 401(k), contributions are automatically deducted from your monthly income. Some employers even match monthly contributions. There are traditional 401(k)s where contributions are deductible and Roth 401(ks) where contributions are not tax deductible. A retirement planner will guide you on the advantages and disadvantages of each and select the one best suited for you. 

Once you have calculated your ideal retirement amount, determined the required monthly contributions to reach it, and identified suitable investment vehicles to save in, you’re ready to go. Execute the plan religiously. 

Depending on your age, you may have to save more or less for retirement. Younger people typically have lower monthly contribution requirements as they have many years to grow their savings, while older people have higher contribution requirements. People with higher incomes also tend to save more. 

Stick to the plan your retirement planner has created for you. Your advisor may even recommend you prioritize certain investment vehicles like employer-matched 401(k) plans. Max out contributions to these before shifting to the secondary vehicle. This will place you in the best position to retire comfortably. 

Finally, routinely go through your retirement plan with your advisor to track your progress. In case your financial circumstances or future goals change, your advisor will adjust your retirement plan accordingly.

Gerard Dougherty

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