Once upon a
time in America many corporations offered their
employees a benefits package that included a pension. In
return for faithful years of hard work employees were
given enough money in their retirement years to enjoy a
comfortable life. However, this became a financial drain
on corporations, and as a result, most companies made
the decision to cut pensions out of their benefit
programs. This development created the need for
alternate ways for people to fund their
retirements.
Over time it
became obvious that people were going to be responsible
for creating their own individual savings plans.
Initially, there were limited amounts of options and
information that was available. However, this has
changed dramatically over the last several decades.
Let's take a look at the basic steps of establishing a
retirement savings plan.
Steps for Saving
- Create a
budget. This is an important first step for a variety
of reasons. It will often help uncover areas where an
individual may be overspending. It will also establish
how much money is available for savings/investing.
- Pay off high
interest debt. It makes little sense to save for the
future by placing money in an investment that may make
12% per year if you are struggling with credit debt
which is costing you 18%. Hopefully, by enacting your
budget you will begin to live within your financial
constraints, with enough left over to pay off these
debts.
- Start an
emergency savings fund. Most experts suggest that you
save enough money to cover 2 to 3 months of living
expenses. This will act as a financial cushion if an
emergency arises or a job is lost. This will help to
preserve an individual's credit and prevent him from
going into debt.
- Begin saving
10% of your income. 10% is simply a rule of thumb.
Your budget may dictate a lower figure, and many
people choose to go higher. Generally, younger
investors benefit by placing their money in higher
risk investments. There will be time to overcome any
dips in the market, while at the same time taking
advantage of high growth opportunities.
- Start Early.
The longer an investment grows the more it is effected
by compound interest. Each year the balance gains
interest which becomes the new balance. For example.
If a person begins with 2,000 and gains 10% interest
annually, then after year one the interest is $200 and
the new balance is $2,200. At the end of the 2nd year
the interest is still set at 10% but it now totals
$220. In this example the total balance (with no
additional investments) after 30 years is $34,898.80.
This shows the power of compound interest if you start
early.
- Plan your
retirement. Although you won't know every detail, try
to determine when you would like to retire, and how
much money you will need to live the lifestyle you
desire. These figures will help give you an idea of
how much you will need to save. It's important that
you don't underestimate your desired lifestyle. This
can only hurt you in the long run.
- Factor in
inflation. The amount you would need to retire today
will almost certainly be greater 10 years from now. Be
sure and figure inflation into the equation. There are
some great free online inflation calculators available
on the internet.
By following
these steps now, you can help ensure that you will be
able to enjoy your retirement years. The longer you wait
the harder it will be to reach your goals, so start
today!
