Retirement traditionally means the well-earned rest from 9 to 5 work in the golden years of life. But interestingly the word “retirement” more often invokes a sense of anxiety and dread; a heavy pit in one’s stomach. So instead of having dreams of golf and travel, we are instead tortured and obsessed with how we will possibly afford a retirement! Then there are the every present questions, “How much do I need to save?” and “Where do I put the money?”
It’s true that comprehensive retirement planning is complex. But that is no reason to throw in the towel. Retirement planning can actually be very doable when done step by step. These 6 simple steps can assure a great start to retirement savings and are easy enough for anyone to follow without professional assistance.
1. Live on less than you make
Spend less than you earn. Period. It will be hard to have any real monetary success until this skill is mastered.
2. Pay off all consumer debt
Consumer debt is defined as all debt excluding house mortgages and sometimes student loans–this means credit cards, car loans, store loans, etc. There are several approaches to paying down debt, including paying down the highest interest rate first. One approach that merits attention is called the snowball method, which involves paying off the loans from smallest to largest. (It is supposed to provide periodic tastes of success which keeps you motivated.)
3. Establish an emergency fund
But aside money for an emergency, such as unemployment or unexpected medical bills (not for a home down payment, car repairs, Christmas vacation, etc etc etc). This account acts as a buffer, helps you to feel secure, and helps you avoid more consumer debt in an emergency. There are different recommendations on how much to save varying from 3 to 12 months worth of living expenses. Sit down and figure out how much it costs your family to live for 1 month and multiply that by at least 3 months or more.
4. Max out an employer sponsored 401k
Now actual retirement savings may begin. Most employers offer a 401k plan to their employees. You can elect to withhold a certain percent of each paycheck to be put into your 401k. These contributions are income tax free. You can contribute up to $17,500 per person per year in 2013. For those age 50 and older, the most is $23,000 per person per year.
Many employers also contribute to employee’s 401k, most often determined by and in relation to how much the employee contributes. This is essentially extra money from your company! Contribute as much as needed in order to maximize the company’s contribution.
5. Contribute to an IRA
If you are contributing the maximum amount possible to your 401k and still have more money to invest, you can also contribute to an IRA, another similar retirement account to a 401k. A traditional IRA is tax free and you may contribute up to $5,500 per person in 2013. For those age 50 and older, the most is $6,000 per person per year.
6. Pay off your mortgage
At this point there is room for speculation on what to do with any available monies, but paying off your mortgage will eliminate one of your largest expenses, ensure you still have a home if your financial situation becomes rough, and provide you with an asset that will always have value.