Working Toward Your Retirement Goals

How to get started & work toward your goal.

In May 2008, I graduated from college and was looking for my first "big kid job". After about 6 months of job searching, I finally landed the gig that would be the first step in my career. Do you remember all of the overwhelming thoughts and learnings that come with your first job? Meeting a ton of new people, finding the restrooms, learning how to use Outlook, familiarizing yourself with conference rooms, setting up your own health insurance for the first time, and ... starting your retirement fund.

I was in the wonderful position (yes, that is 100% sarcasm) of starting my first job whilst also moving out to live on my own. I remember the first month sitting in my apartment crying because I had no clue how I was going to pay for everything. And on top of that, you want me to contribute part of my (already small) paycheck toward a 401(k)? Forget it!

But as luck would have it, a few months after working for the company and getting my feet under me living on my own, the company brought in financial advisors from John Hancock (which was the company we used for our retirement plan services). They hosted a lunch-n-learn and I quickly learned that even if I couldn't contribute much, I should start contributing to a 401(k). So I did. And here I am 33 years old today, and happy to report that my retirement savings are growing. Yay me! But despite my savings growing, I still don't feel I will be anywhere close to retirement at age 60, 65 or even 70. Sigh.

Where are you in this retirement savings game? Have you been saving since your very first job? Were you late to the party? Haven't started saving yet? Well don't worry because a recent glance at my 401(k) sent me down a rabbit hole to update my retirement strategy, and I learned a lot along the way that can (hopefully) help all of us!

Quick CYA: I am, by no means, a financial advisor. I simply compiled some tips to help you based on my own personal research. Please consult a financial advisor if you want advice on your personal situation.

Pick a retirement plan

Financial situations are personal and unique to each of us. There will never be blanket monetary guidance that will fit us all to a T. If you've already established a retirement plan, way to be! Skip on to the next section - or like they say in Monopoly, "advance to go". Wouldn't it be great if we could actually collect $200? If you're new to this game of retirement, this section will help you understand the different types of retirement plans out there.

Traditional IRA

IRA stands for Individual Retirement Account. A traditional IRA is an account specifically for retirement savings with deferred tax (meaning your money is not taxed until it's distributed). This may be especially appealing if you are looking to reduce your tax bill/taxable income today.1 Many employers offer IRAs, but you can also open one on your own.

• Contribute money now, pay taxes later (your withdrawals in retirement are taxed as income; word of caution - tax rates may increase by the time you retire)
• There are contribution restrictions
• Contributions are tax deductible if you qualify

Roth IRA

Just like a Traditional IRA, a Roth IRA is an account specifically for retirement savings. But the main difference is that you contribute money now and you pay taxes now. If you expect your tax rate to be higher in the future (you go Glen Coco!), then this option might be appealing to you.2

• Contribute money now, pay taxes this year
• There are contribution restrictions
• Contributions are not tax deductible

Pension plans

A pension plan is a type of retirement plan setup by an employer. The employee adds money into a fund that includes contributions by the employer.3 Here's how they work: the company will set aside a fixed percentage of your salary in a retirement account and then invest the account proceeds on your behalf. Pension plans are typically calculated based on:

• The employee's number of years with the company
• The employee's age
• The employee's annual income

Bonus: Employer matching

Good news: Some employers will match a percentage of your contribution. Bad news: Only 51% of employers that offer a 401(k) plan match their employee contributions.4 If you're lucky enough to be employed by a company that offers matching, that is (almost) free money! Almost because you will eventually have to pay taxes on it, but the contribution itself is free.

The average employer match is 3.5%.4 Based on this number, let's take a look at an example. Let's say that your employer matches 50% up to 3.5%. That means they will match 50% of your full contribution if you are contributing 7% or less. You can still contribute more than 7%, you just won't be able to get any additional employer matching beyond the 3.5%.

Employer matching example:

• Annual gross pay (before taxes): $40,000
• Your retirement contribution (at 7%): $2,800
• Employee match (50% of the 7% = 3.5%): $1,400

Set some milestones

If you read many of my blogs, you know I'm a planner. I like to set goals for myself so I can track my progress and make adjustments along the way. Retirement savings are very easily "out of sight, out of mind". Which is a terrifying thought if your future is depending on your retirement fund. But that's why I'm a fan of goals; they will force you to check in on your retirement savings periodically to see if you've achieved your goals. So how do you set goals? Well, this is a tricky question. I spent a lot of time researching how much money I will need to retire, and surprise, surprise, there's conflicting information out there.

I decided to group some of these goals together into categories. Personally, I'm going with a combination of goals across the different categories but you do you. The main objective is just to set some goals.

Goals by age

Fidelity recommends that you have 10x your annual salary saved by age 67.5 They also put these handy milestones together to keep you on track if this is your goal:

• By 30: Have the equivalent of 1x of your salary saved
• By 35: Have 2x your salary saved
• By 40: Have 3x your salary saved
• By 45: Have 4x your salary saved
• By 50: Have 6x your salary saved
• By 55: Have 7x your salary saved
• By 60: Have 8x your salary saved
• By 67: Have 10x your salary saved

Goals by percentage

Have you heard of the 20-30-50 plan? It suggests that 20% of each paycheck goes to investing or saving (i.e. retirement), 30 percent is for leisure and general spending, and 50% is for bills.6 #lifegoals I don't know about you, but I'm not quite there yet. However, I can start small and work my way up. Behind the scenes, I set some age goals in conjunction with these percentages. You may want to consider the same.

• Contribute 1% of your annual salary (this is for those of you just getting started).
• Contribute 7% of your annual salary (The average employer match nets out to 3.5%.7 So this could get you to the point of taking full advantage of employer matching. Be sure to check with your employer to see if/what matching they offer. Depending on their matching, you may want to adjust the percentage in your goal.)
• Contribute 10% of your annual salary
• Contribute 20% of your annual salary

Goals specific to your situation

Obviously we've never met - or at least I don't think we have - so I don't know your age, income or any additional details about your personal situation. But I do appreciate a math nerd who wants to set more specific goals. While I can't personally help you do that, I can share some nifty tools with you.

• Smart Asset Retirement Calculator: This tool takes you step-by-step through how much you'll need in retirement.
• Bankrate Retirement Calculator: This is a more simplified calculator that makes some assumptions for you like the inflation rate and rate of return on your investments. It's a decent ball park if you want a quick benchmark.

Just my 2 cents

• Ask about a retirement advisor. If your retirement account is through your employer, you may have access to a free financial advisor. Usually the advisor can help you setup your retirement plan, answer your questions, and provide you with a variety of investment opportunities.
• Avoid early withdrawals. Once you have a good amount in your retirement account the thought might cross your mind, "I could use these funds to fill in the blank". As appealing as this may sound, DON'T! Early withdrawal can hurt you in the pocket book because you may be subject to an early withdraw penalty - up to 10%. And that's in addition to the taxes you'll pay on the withdrawal. For example: You have $5,000 in your retirement and you withdraw $2,000 from the account. You could be subject to up to $200 in penalty fees. That's $200 out of your pocket and out of your savings that you could be earning interest on.
• Don't give up. I will fully admit that I have had my moments of thinking I will never be able to retire. Times when money is tight and you can't increase your contribution (and perhaps even have to lower your contribution). I've found myself thinking: I'm screwed. If you've had similar thoughts, don't give up. Try shifting your focus with the end goal of starting to - or increasing - retirement fund contributions. If you need help paying off debt so you can get back to saving, check out How to Slay Debt Like a Boss. If you're on the budgeting struggle bus, check out these budgeting tips.
• Don't let retirement scare you. I know this is a lot to take in. But remember, it's all so you can achieve your retirement goals. Let retirement be something you're prepared for and can enjoy ... like a fine wine. Note to self: Save money for fine wine.