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Published On: Sun, Jun 23rd, 2019

Retirement Planning Basics

Retirement may feel like it’s a long way away for you — even if your retirement itself is all too close. Too few of us really know what to do to plan for a comfortable retirement, but it doesn’t have to be this way. Below, we’ll lay out the basics of saving and planning for your retirement.

Your retirement plan in one sentence

At the heart of any good retirement plan is this simple idea: Save a little bit at a time, and invest it.

The key to your long-term savings and retirement plan is that simple sentence. You’re not going to save for retirement all at once; you don’t need to. You just need to put away a little bit at a time. And the second part of our sentence is crucial, too: You need to invest. Investing is a key part of this because of inflation, which will reduce the value of your cash savings over time. Investing will counter this, and it will also allow you to reap the benefits of compound interest.

photo courtesy of Greenberg Health

Compound interest is a powerful concept that will be crucial to your retirement. The idea is simply that interest you earn becomes a part of the principal amount upon which your future interest will be earned. So if you invest $100 and get a 10 percent return, you’ll have $110 — which means that, next year, 10 percent interest would earn you $11 instead of just $10. Over time, this effect compounds. In fact, a dollar saved in your 20s can be worth as much as $10 saved in your 50s!

Building your savings

Not every dollar you earn should be invested, of course — or even saved. You have expenses, and you have to live your life. But you should take care to try to save what you can. Ideally, save between 10 and 20 percent of your income toward long-term goals like retirement.

Where should you put this money? Some of it should go into a savings account, explain experts at a trusted Michigan credit union. While savings accounts don’t offer quite the same high returns as stocks and bonds can, they will give you reliable interest. Plus, it’s easy to get your money back out of a savings account when you need to spend it on something important, like a down payment on a home.

Build up a savings account, and keep an emergency fund handy, too — you don’t want a sudden expense to crop up when you have no liquid assets to pay it off. If that happens, you could end up having to take out toxic short-term debt. That’s not a recipe for a happy retirement!

Investing your savings

Let’s say that you have your emergency fund and a health savings account. Now what? Well, now you need to start investing — and the sooner, the better, because you want to take maximum advantage of compound interest over the years that you’ll be saving.

Start by focusing on tax-advantaged accounts like 401(k)s and IRAs. If you can, max out contributions to those — but remember not to put all of your savings in there, because there are big penalties for early withdrawals from such accounts. Keep your emergency fund separate, along with long-term savings for things like a future home purchase, and then put whatever you can beyond that into a tax-advantaged retirement investment account.

Depending on your age, you’ll probably want to be pretty conservative with your retirement investments. Slow and steady wins the race: Over time, the market tends to go up, so putting money in week after week and month after month will leave you in a good position to make money even if there’s a crash or two between now and the year that you retire. A “set it and forget it” investment strategy may be just the thing for your retirement fund.

With that said, plenty of other investment and trading strategies are out there, and some of them can be very powerful. If you’re very young and open to more risk, or if you are comfortable with your retirement funds and want to get aggressive with some cash that you can afford to lose, you may want to try trickier moves and trade more actively on the market. With the right research, steely nerves, and just a little bit of luck, you might just make big bucks. Just remember to put a portion of that windfall away for retirement, OK?

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About the Author

- Rupesh Singh is freelance writer and founder of moneyoutline.com You can follow him on Google + & Facebook.

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