This post is part of the 2020 The Clarity Project, a yearlong series of challenges to get organized and simplified with money. Read about the project at this introductory post here.
This Week’s SAVE Challenge: Check your retirement savings and your contribution rate. Bonus: increase your contribution by one percent (or more!). Here are the 5W1H (the 5 Ws and the 1 H) to explain about retirement savings, for people of any age.
WHY should you check your retirement savings?
We all know we should do things that are good for our future selves.
Future you will thank you for doing the right things when you are younger: eating right, exercising, focusing on healthy relationships, developing good work habits. For many of those areas, you have to do or make decisions every day to practice those good habits.
Future you will also thank you—most definitely—for having set aside money so that when you are older, you have options and freedom.
The great thing about saving early and automating the process is that you do not have to focus on it every day, or use willpower to force yourself to save. Once you set it up, the savings will automatically happen, and the money will make more money for you (thanks to the magic of compound interest).
Checking your retirement savings accounts this week is a great way to see where you stand right now, and how much you are currently contributing to your retirement savings, and bump that number up if you can.
WHO should have retirement savings?
Nearly everyone is eligible to put money into some kind of retirement savings, usually (but no always) if you have income.
If you’re older, you should definitely have–and be checking–your retirement savings regularly.
But if you’re young—and I mean as young as a teenager with an after-school job young—you still should have retirement savings.
Even if you don’t have income (in certain circumstances), you can still contribute to your retirement savings.
For instance, if you’re a stay at home mom (or dad), the income of the spouse who works outside the home can be used to save for the stay-at-home parent.
WHAT are some types of retirement savings?
There are many, many different ways for someone to save for retirement. I won’t cover all the ways, but I can share the main ones, some ideas, and offer some resources for further reading.
Employer-sponsored plans
If you have a W-2 job, meaning you work for someone else or a business, school, or non-profit, or the government, you likely have a 401(k), 403(b), or other savings or opportunities.
Taking advantage of this is a no-brainer, especially if the employer offers a match. That means if you put in $100 in your 401(k) or other account, your employer will “match” that amount up to a certain percentage of your income. This is a guaranteed 100 percent return on your money. Set aside money for retirement here first.
Self-employed plans
If you are self-employed, there are a lot of different options.
If you are young and your income is not too high, you should strongly consider a Roth IRA. I have encouraged all my kids open Roth IRAs, as it allows them to put aside money now, when they owe little to no taxes, and the money will grow tax-free forever.
With the power of compound interest, you can easily save for the far-away future in a way that will benefit you much more than the amount you are saving right now.
For further reading: Nerd Wallet has a great guide to saving for retirement. Here is the section on different types of accounts.
WHEN should you check (or start) your retirement savings?
This week, take a few minutes to log into your retirement account at your employer. If you do not know how or do not have the login, find out how to do so this week. Then, keep your login handy (and secure!). A bonus here would be setting up two-factor authentication or similar security for the account(s).
As you will hear from me a lot this year, it is never too early (or late!) to start saving.
This goes double for retirement savings, and triple for the retirement savings vehicle of a Roth IRA.
WHERE should you have your retirement savings?
If your employer offers a 401(k) or similar account, much of your retirement savings will “live” there. But many people will benefit from a separate account for retirement. This can be helpful for such things as Roth IRAs or prior employer “rollovers.”
If you do not yet have any retirement savings accounts, this mission may take longer than the five minutes. But it is 100 percent worthwhile. Start with your employer and see if you can be part of this benefit.
Some people may have one without knowing it, since many employers have adopted an “opt-out” model for retirement accounts. That means that employees are automatically enrolled in the company 401(k) and some percentage diverted there (along with a match, if offered). This is an improvement from the prior “opt-in” model, in which employees have to actively sign up to participate.
If you are self-employed, or if your employer doesn’t offer retirement savings, explore opening up your own IRA (ideally a Roth IRA!!!) at a low-cost online brokerage. It’s easier than you think.
I have accounts (of varying sorts at three of the major low-cost brokerages: Vanguard, Schwab, and Fidelity. I find them all pretty easy to navigate and work with for questions or rollovers (for example, from previous employers).
If you are opening a Roth IRA for a minor child, the process is a little more complicated. That’s because the account will have to be under your brokerage account. I will explain more about how to do that later in the year.
HOW should you keep track of your retirement savings?
I wrote about tracking your net worth here. As I talk about, using a free online software like Personal Capital can be worthwhile.
You can also put together a simple spreadsheet. I talk about that in my net worth post here, but to briefly recap:
Your net worth calculator should have two sections: assets & liabilities. Your net worth equals assets minus liabilities.
Assets include anything of value that you would like to include:
*retirement accounts
*value of house or car(s)
*any other savings accounts
Liabilities include any debts you owe:
*mortgages or car payments
*student loans
*personal loans
*credit card debt or other debt
Now subtract your liabilities from your assets, and the result is your net worth.
It might be negative–this can definitely be the case for young people who have student loan debt. Don’t worry! Just seeing that number change from less negative to positive over time will be a great motivator.
Tracking your retirement savings is a great way to get and keep motivated about your long-term financial goals. It can even inspire you to start saving more intentionally for short-term goals. We’ll dive into short-term goals & savings next week. Stay tuned!
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