Your career is rolling and perhaps you're just starting a family. You're thinking about buying a house and probably dealing with some credit card debt. Now is the time to start saving for retirement.
The Big Three: What You Should Do Now
- Pay yourself first: This is the easy part. You've got time on your side. Aim to save 10 to 15 percent of your gross income for retirement. It adds up over the long haul. Here's a simple example: If you earn $40,000 and set aside 10 percent ($4,000) a year in a retirement fund for 35 years, your nest egg would grow to $553,000 (assuming a 7 percent rate of return). Delay saving by five years and your nest egg would be $378,000. Wait 10 years to start: $253,000. Even if you can't save 10 to 15 percent, save something. "Set it aside first, and you won't know it's gone," says Mark Wilson, a certified financial planner at Tarbox Group in Newport Beach, Calif.
- Get life insurance: If you're starting a family or have a partner who isn't working, start thinking about life insurance, which provides for your family if you die. And it's less expensive if you get it while you're young. A 25-year term life insurance policy of $400,000 for a 35-year-old costs about $400 to $500 a year, Wilson estimates. A term policy--what most folks consider "pure" insurance--pays your beneficiary a one-time death benefit. Other life insurance options combine a death benefit with an investment feature and cover you for life. How much life insurance do you need? Use this calculator from CalcXML to find out.
- Get control of your debt: If you're carrying balances on your credit cards, start paying them off. Tackle the balance with the highest interest rate first. "About 30 to 40 percent of households don't carry credit card debt, but the ones who do are in the $10,000 and up range," says Greg McBride, a chartered financial analyst at Bankrate.com. Should you save for retirement or pay off costly credit card debt? You owe at double-digit rates and your retirement investments are only yielding single-digit returns, so Wilson advises that you nip the debt problem now and then step up savings. To figure out how long it will take to pay off your credit cards, use Bankrate.com's debt calculator.
Other bills? Make sure you can really afford a car payment or mortgage before signing on. Your mortgage and other housing costs shouldn't total more than 30 to 35 percent of your gross income. Can't afford it? Don't buy it.
Long-Term Savings: About That Retirement Account
If you work for a company, you may be able to enroll in a 401(k) savings plan, which allows you to invest a percentage of your paycheck before taxes are taken out. Another option: If you are self-employed or work for a company without a 401(k) plan, you'll want to set up your own savings account, such as a Roth IRA (individual retirement account) or a traditional IRA.
The payoff: Your contribution to a 401(k) retirement savings program lowers your taxable income to Uncle Sam, so you receive a nice tax break right away. The maximum you can save in this type of account is $16,500 in 2010. (You will pay tax on the funds later in life when you tap your 401(k) for retirement.)
Why a 401(k)? If your employer offers a match--contributing money to your account based on the percentage of your salary that you contributed--then you should participate at least up to the percentage to be matched. This is a no-brainer: Enroll and take the free money.
If your company doesn't offer a match: Consider a Roth IRA. The beauty of the Roth? It's a tax-free future. There's no tax break right now because you fund the Roth with money that's already been taxed. But your earnings grow tax-free, and when you withdraw funds later there's no tax hassle. A Roth might be a better choice than a 401(k) if you expect to earn more money later. A rule of thumb from one tax expert: If you're in the 15 percent tax bracket or lower, go for the Roth.
What's the right mix of investments? That depends on how much risk you can tolerate. Remember, these are investments. You need stocks to help your fund grow. But you want to temper it with other investments -- such as bonds -- that provide income in other ways. You might want to consult a financial expert to plan your portfolio. In general, during your 30s, consider a mix of 70 percent stocks and 30 percent bonds/cash in your retirement fund. Or, if you want a more aggressive approach for the long haul: 90 percent stocks and 10 percent bonds/cash. To see what mix might work best for you, try this calculator from CNN Money.
Create an emergency fund: You need something to fall back on if you lose your job, the roof collapses or the car dies. Experts suggest building an emergency fund that covers expenses for three to six months. They also acknowledge it's tough for many folks to get there, so start with a few hundred dollars in a readily accessible account. Then stash what you can each month and build slowly.
Designate beneficiaries: Did you sign on the dotted line? Make sure you've designated beneficiaries on insurance and retirement fund accounts. If you have a family, create a will. Be clear on who should take care of the children if you die.
More about 401(k) plans: Profit Sharing/401k Council of America
How does your 401(k) rate? BrightScope.com
How to pay down your credit card debt: Consumer Reports
Life insurance basics: American Institute of Certified Public Accountants