Wednesday, May 27, 2015, AM | Leave Comment
Like the saying goes, when the going gets tough, the tough saves more for retirement. When the financial markets get tough, people who save for retirement have to be even tougher. The market, no doubt, is extremely volatile.
You, as an investor, would be tempted to cut back on your saving. Please don’t. If you have stashed away some money for retirement, that’s for your future. Don’t mess with your future.
If you are employed and are taking part in 401(k) and saving in IRA, please continue to do so. Allowing your money to grow tax-deferred in these accounts is still one of the most powerful ways to save for retirement.
It’s a long process, from age 25 to 65 years. If you cut back on saving or stop saving, or worse, take money out altogether before its time, you lose out on the advantages of tax-deferred compounding.
Studies show that younger investors have increased their retirement savings and their allocation to equities. Now more than ever, the opportunity is really great for long-term investors.
Set your priorities
Saving for retirement
The saving rate among the folks in the U.S. is extremely low for a variety of reasons. But if you are gainfully employed and tend to spend a lot – more than you need to, start thinking about putting more money in your savings to the tune of 10% to 15% of your gross annual income.
More and more financial advisers believe saving for retirement should be considered a top priority. Remember you can borrow money for college, but no one will lend you money for retirement. You should save enough to earn all possible company-matching contributions through your workplace savings plan.
Reduce or eliminate bad debt
You ought to pay off high-interest rate credit card debt and start building a financial nest egg. This means setting aside at least 3 months worth of living expenses in case of an emergency.
Increase tax-deferred savings
Increase contribution to your workplace savings plan to the allowed maximum, if possible. Once you do that, you may want to consider opening an IRA or another tax-advantage retirement savings plan.
If you qualify, consider opening a Roth IRA account as a compliment to your pretax retirement savings.
Hands off savings
Even though economic times are extremely tough, try not to tap into your retirement savings before its time. Unfortunately, cashing on retirement funds is becoming increasingly common for many young workers.
For younger workers, they not only pay taxes on the withdrawal from retirement account, but they must pay 10% penalty. When you leave job, you may be better off rolling your workplace savings directly over to an IRA, to keep these assets growing tax-deferred.
Also, you should consolidate all your retirement accounts – 401(k) and IRA – into one single IRA after you leave your job. It will give you a comprehensive view of your retirement assets.
Continue with your strategy
The markets have always seen ups and downs. Adhere to a well-defined strategy that can help provide a road map for making appropriate investment decisions.
You simply cannot time an investment perfectly. That’s because the best market performance often comes in very short time periods. The point is, if you are out of the market because of bad days, you might miss the chance to make up financially on the good days.
Alternative strategies when close to retirement
Investors nearing retirement may need to consider alternative strategies if they have lost out on these extremely bad days.
You need to assess the impact of any drop in your retirement savings on your future ability to spend.
Put off retiring and work a little longer so you can save more and delay tapping into your retirement savings.
Unless you need the money absolutely to live on, consider delaying Social Security beyond your full retirement age. That step increases your monthly benefit and the total amount you collect.
If you are set on retiring at a certain age, plan on spending less and change your lifestyle.
In a Nutshell
Have a long-term well-thought out financial plan and keep following it. Retirement is your future. Don’t mess with it. It is not good by itself but still better to go through the financial hardship now when you are relatively young than later when you are a lot older.