Retirement, that time in the future that remains a foggy dream for many. We know we want to get there. And, in many cases, the sooner the better. If you won millions of dollars in the lottery today what would you want to do tomorrow? “Retire!” would seem to be the typical response.
Sounds great! But, what does that really mean? Many baby boomers are discovering that retirement is not about laying on a beach or golfing every day. It is about having control of your time. Maybe that means a little beach and golf course time. But, in many cases, it means determining who you want to be in the next phase of life. Having purpose and a plan are key components to happiness in retirement.
Who will you be when you retire? Maybe it means earning money doing something you love, at a pace that is comfortable for you. Maybe it is helping a charitable organization, or volunteering your time for activities you care about. Spending time with family and friends, and sprinkling in some travel appeals to many. Art lessons, learning the piano or perfecting that game of golf are all activities that could await you.
Whatever you aspire to be in your next phase of life a sound financial plan for getting there will help ensure your ability to choose. There are some key pieces of the puzzle that will help ensure retirement success. The earlier you start building a retirement nest egg the easier it will be.
I have identified five primary preparation stages for planning. Beginning with this issue and over the next several newsletters I will dive into each stage with how you can prepare and prosper at each stage.
Early Stage
The early stage of financial planning is when you first begin receiving a paycheck. There is no set age for each stage of planning. Everyone is different, and each stage will come in its own time for all.
With the first paycheck comes greater responsibilities. There is a nervous excitement that comes with having money with which you can now make all the choices. The primary goals for this stage should be to build an emergency fund and buy your first house.
Debt is a key issue at this stage. Minimizing debt is always a priority, but at this stage there may be some debt that is unavoidable.
- Always know the interest rate you are paying on debt, and strive to pay off debt with the highest interest rate first.
- Credit Cards- Pay off credit cards every month to avoid high interest debt. Use credit cards to build up a positive credit rating and to earn benefits such as cash back or airline miles.
- Home Mortgage– Try to buy an affordable home when you can. A home should be one of your first large, long-term investments. With relatively low interest rates mortgage debt is a solid investment in your future.
- Car– Seek a reliable car with minimal cost that you can purchase. A car loan is reasonable if you need cash to invest in a home. But, the ultimate goal should be to eliminate car loans and save to pay cash for cars.
Saving is something that can never be started too early. While some debt is inevitable for most at this stage, starting to save for emergencies and retirement is important.
- Emergency Fund– Set aside 1-2 months living expenses in a savings account for unforeseen expenses.
- 401(k)– if your employer offers a 401(k) with a match, strive to set aside enough of your salary to maximize this match. This is an easy pay raise that shouldn’t be left on the table.
- Roth IRA– At this stage you are likely below the maximum salary level for IRA contributions. If you have paid off higher interest credit and own a home, set aside up to the maximum contribution limit. In 2017 the maximum contribution is $5,500 per year for those under age 50.
The earlier we financially prepare the easier future stages become. It is never too early to plan for retirement needs and loved ones we will one day leave behind. The earlier we start to save the greater future rewards will be.