Saving for Retirement: First Steps
I don’t know about you, but even though I see myself working until I’m 100 (one can dream, right?), I want that work to be done for pure enjoyment rather than necessity. In other words, I want the option to retire, even if I don’t take it. That means I need to think about saving for retirement now.
Retirement planning is one of those things that I think most people feel like they should do—and even want to do (to be “responsible” and all that)—but maybe they don’t quite know how to get started. If you fall into this camp, these are the first steps to take:
My friends who got corporate jobs went in for new employee orientation, their HR director introduced them to the the company-sponsored retirement plan, they signed up, and that was that.
For us self-employed musicians who don’t have personal HR directors at our disposal, it takes a little more initiative.
You’re already taking initiative by reading this article. Gold star for you! (Now keep reading.)
Understand the Options
There are a number of options for self-employed folks to save for retirement. The IRS describes many of them here, but if you want something a little easier to read, I like this Retirement Guide from The Simple Dollar.
Get Professional Advice
Even if it costs a few hundred dollars, I highly recommend talking to a certified financial planner about your specific situation. You won’t regret it.
Prepare for the Initial Investment
You don’t need a ton of money to start saving for retirement, but some funds do have minimum investments. You can shop around to find one with no minimum or start saving to make that minimum investment as soon as possible.
Make Ongoing Investments
Once you’ve set up your account(s), come up with a goal for how much you will invest each month. You may choose a fixed dollar amount, a percentage of income earned, or a combination of the two.
For fun (and extra savings), you can challenge yourself to go without something you regularly spend money (think coffee or movie tickets or eating out) for a month and put that extra savings into retirement.
Want an easy way to ensure you are making progress towards your retirement savings goal? Treat your monthly contribution like you would any other “bill.” Give it a due date and, if possible, set up an automatic transfer from your bank account so you don’t have to think about it.
Don’t Freak Out
The uncomfortable part of investing in an account tied to the stock market is that some months it goes up…and some months it goes down. Don’t let these fluctuations scare you. Your money could be in this account for decades and, over time, these funds generally earn around 7% interest. This is so much better than you can expect from a plain old bank savings account these days.
While you’re young, you can weather these fluctuations and reap the rewards. As you get closer to retirement (when you’ll be depending on the money you’ve been saving for so many years), you’ll shift your money into investments that won’t have as high a rate of return, but are more stable.
Take Advantage of Time
The most valuable contribution you can make to your retirement savings is actually not money, but time. Thanks to the power of compounding interest:
- Every $1 you invest at age 20 will be worth about $30 when you are 70.
- Every $1 you invest at age 30 will be worth about $15 when you are 70.
- Every $1 you invest at age 40 will be worth about $8 when you’re 70.
As you can see, every dollar counts, but those invested in your 20’s and 30’s count quite a bit more.
What are you waiting for? Start saving for retirement today.
That’s really all there is to it. Make it a priority to start saving for the golden years today. Even if you can only spare a few dollars a month initially, your Future Self will be grateful.