News From Terre Haute, Indiana

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December 14, 2013

Start with basics when it comes to saving for retirement

TERRE HAUTE — No matter where you are in the retirement planning process, there are a few important steps to make sure you have covered:

• Have a plan. If you haven’t already done so, create a savings and investment plan that takes into account your specific situation and goals. The sooner you do this the better. Consider important questions like when you want to retire, what you expect your lifestyle to be like in retirement, and how much you currently have saved. Then create an appropriate portfolio asset allocation designed for the long term and establish reasonable investment return expectations that allow room for some year-to-year volatility.

• Be aggressive with savings goals. As an example, Schwab Center for Financial Research recommends that people in their 20s try to set a savings floor of at least 10-15 percent of pre-tax income. And the longer someone waits to start saving, the higher that percentage goes in order to catch up and stay on track. There are a number of ways to invest and save for retirement, but good places to start include employer-sponsored plans such as 401(k)s, especially if there’s a matching contribution. Then extra savings can go into a deductible traditional IRA or Roth IRA, if you’re eligible.

• Don’t live beyond your means. Budgeting and saving doesn’t have to be rocket science — don’t spend more than you earn. Living below your means now will help ensure you are saving more toward a comfortable retirement. On the flip side, living beyond your means now has multiple drawbacks. It’s hard to make ends meet, you’re falling behind on retirement savings, and you are likely becoming accustomed to a lifestyle that you can’t sustain financially over the long term.

It’s a good idea to revisit your plan, progress and goals at least on an annual basis and a professional advisor can help connect the dots by working with you to establish reasonable goals and an investment plan designed to reach those goals.

Where should retirement fall among other savings goals?

A common question people ask is where saving for retirement should fall among a long list of savings goals that can include setting money aside to buy a home, paying for a child’s education, or spending on smaller short-term expenses like vacations.

Everyone’s situation is unique, but it’s important to remember that you may be able to get loans for things like education and homes, but you can’t get one for your retirement, so it makes sense to put that toward the top of your list of saving priorities. This makes budgeting an even higher priority.

Prepare for the unexpected: After you’ve taken advantage of an employer matching contribution, paid down debt and set up an emergency fund, then it makes sense to go back and contribute the maximum to your company plan, and, if eligible, contribute to an Individual Retirement Account (IRA) or ROTH (IRA) as well. Money in these accounts can grow tax-deferred until retirement.

Once you’ve put yourself in a solid position to meet retirement savings goals, then you can turn to additional priorities, such as a child’s education, purchasing a home and paying down additional high interest debt like tax-deductible mortgage, home equity line of credit, or student loan of your own. The order in which you attack these will depend on the specifics of your situation.

And while everyone’s unique circumstances and goals will have their own complexities and difficult decisions, remember that when it comes to retirement savings, we should all start with the basics: have a plan and stick to it, save as a aggressively as you can, and commit to not living beyond your means. Accomplish these basics, and even the harder financial issues can become easier.

David L. McKimmy is branch leader and financial consultant for the Charles Schwab & Co. independent branch in Terre Haute.

Investing involves risk, including possible loss of principle. The information above is not intended as individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends that you consult with a qualified tax advisor, CPA, financial planner, or investment manager.

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