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3 Steps to Start Saving for Retirement

shutterstock_2461859Guest post by Richard Peace. Richard is a licensed Benefit Consultant (LHIC) at Financial Benefit Services managing various employer groups in the Dallas/Fort Worth Metroplex. Follow him on Twitter @richpeace.

Perhaps the biggest challenge for new young professionals is understanding why and how to save for retirement. Besides, aren’t you young and full of life? Why would you even need to focus on retirement? It’s at least 30 years away and you have the rest of your life to worry about all that grown-up stuff.

Here’s the deal: If you don’t start saving now, you WILL wake up one day and realize that in order to live the life you want, for the rest of your life, you will have to play catch-up. Playing catch-up with your finances is a slippery slope. Don’t let saving for the future slip your grasp in your younger years.

Use these three steps to get your saving machine rolling. A little now can create a lot of wealth later.

Utilize your employer’s 401(k)

This is so painless and quite honestly if you’re not contributing to your 401(k) then you need to be slapped upside the head with a wet noodle. Here’s what you need to know. All contributions to a 401(k) are tax free. For example, if you’re in a 25% tax bracket (average) and you contribute $3,000 a year to your 401(k), you just saved $750 that otherwise would have been paid in taxes. ($3000 401(k) contribution x 25% = $750). If the idea of investing in the stock market is intimidating to you have no fear. All of the 401(k)s that I have looked at have what is known as Target Date Funds. These are funds that do all of the work for you. Essentially you pick a year that you envision yourself retiring. Based on that timeline the Target Date Fund will put your money in to the most risk appropriate investments. It is simple. My recommendation is to stay in a Target Date Fund until your 401(k) balance reaches approximately $10,000. Once your balance reaches that threshold you can dig a little deeper in to the specific investment options that your 401(k) offers. If you’re a little more confident with your investment know how you can skip the Target Date Funds and go directly to Mutual Funds. My favorites are Index Funds, because they carry extremely low expense ratios and regularly beat actively managed funds.
Seriously, if you’re not putting money in to a 401(k), go talk to your HR department now and get it set up. Even if it’s only $25 a month. Do it.

Open an Independent Investment Account

I talk about my experience with opening a Vanguard here. While I love 401(k)s and think they are the first, and most important, step to securing your future wealth, there is something to be said about liquidity. All 401(k)s contributions are governed by age. Any money you put in to one you will not be able to withdraw until you reach the age of 59 ½. The beauty of having an independent Investment account is that your funds remain fully liquid, meaning that you can access them at any time. The primary drawback is that money you invest outside of your 401(k) is not invested on a pre-tax basis. The benefit is, as stated above, all contributions are accessible regardless of age. Opening an account with any of the major investment firms (Vanguard, Fidelity, etc.) is simple and can be done online. You can set up automatic deposits from your checking account (recommended) and like your 401(k) it becomes automatic.

Debt: Don’t do it

Any form of debt is money that you don’t have and therefore are borrowing from someone else. If you have to borrow money then quite simply you can’t afford whatever it is that you are buying. Debt gets in the way. It’s like that car that cuts you off on the highway and then hits the brakes. All you want to do is make it home and they are holding you up. Financial freedom is your home. Debt is the jerk that cuts you off. Instead of using someone else’s money, only buy what you can pay for in cash. Continue to save towards your financial goals and make it home.