5 steps to start your retirement plan
If you are just starting out your work life, retirement may seem too far off to be a concern. But the decisions you make now will determine how comfortable you are decades down the road. The good news is that a little planning and commitment are all you need to start saving for retirement.
1. Decide your target retirement age and income. Don’t worry—you can and may change this in the future. But if you can estimate when you want to retire and the lifestyle you want to lead, then you can begin calculating how much you need to reach your goals. Click here for an estimate on how much you need for retirement.
2. Start planning early. The sooner you begin investing for retirement, the more potential your retirement savings can grow by the time you reach retirement age, thanks to the power of compound growth. For example, a 25-year-old who invests $4,000 a year for 10 years and then leaves the balance to grow at 8% annually could have a $650,000 nest egg at age 65. Late starters may need to invest more aggressively to reach their goals. If that’s your situation, click here for some guidance on ways to help fast track your retirement savings.
3. Learn about tax-deferred savings vehicles. A 401(k) and an Individual Retirement Account (IRA) both allow you to invest pre-tax dollars and let them grow without any taxes due until you withdraw the money in retirement. If you anticipate being in a higher tax bracket when you retire, consider a Roth IRA. You’ll pay taxes now on the money invested, but your withdrawals will be tax-free. To learn more about tax-deferred accounts and retirement planning tools, visit the Retirement Center.
Retirement Savings Tip
If you are eligible to contribute to a 401(k) and your employer offers matching funds, make sure to save enough to qualify for the maximum match. That match is a bonus; you want to get every penny you are entitled to.
4. Save as much as you can for retirement. You’ve set your retirement target already. Now don’t forget to maximize your saving and regularly check your progress to be sure you’re on track. If you are having trouble keeping up with your retirement target, take another look at your budget to see where you can save more.
5. Diversify your investments. Make sure you have an appropriate mix of stocks, bonds and cash: stocks for their growth potential, bonds and cash to help cushion your portfolio during periods when stocks are volatile. One general guide is to subtract your age from 100 and then invest that portion of your assets in stocks. So if you are 25, consider investing about 75% of your money in stocks, though each person's situation is unique. Also, don’t invest too heavily in any one asset—including your employer’s stock, since a downturn at your company could cost you both your job and your portfolio. Find out how a Merrill Lynch Financial Advisor can help you manage your investments to reach you retirement goals.
What's next? Create your own savings plan
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