The Most Important Decision In Your Retirement Plan Is … your savings rate, period. Nothing else comes close. How early you decide to start saving is huge, yes, but at any age your savings rate is most important. So, put aside as much as you can afford, and start saving now if you haven’t already.
THE CHANGING RETIREMENT LANDSCAPE
Retirement planning has changed considerably in 20 years. The 30-40 year company employee has nearly disappeared, replaced by employment relationships that last, on average, only 4.4 years. As a result, individuals are more responsible for their own retirement planning, and 401(k) plans, which came into their own in the 1980s, have become widely popular. Some 401(k) features helped alter retirement strategies, too. According to a Forbes article:
In decades past, workers built retirement savings by paying down the mortgage balance on their home, putting money in savings bonds and building up cash values in their life insurance policies. Although it can be argued that these approaches are admirable, the reality is that not as many Americans are doing this. Instead, a sizeable chunk of a family’s retirement savings sits in their qualified plan at work. 401(k) features, such as automatic enrollment and employer match, make it increasingly easier to build up a retirement nest egg.
There are a host of decisions that impact how you manage your 401(k), but none is as important as the rate at which you save.
Adequate savings is the primary driver of retirement success and is approximately 5 times more important than Asset Allocation, approximately 30 times more important than Actuarial Assessment & Intervention, and approximately 45 times more important than Asset Quality. Although Asset Quality typically receives the most attention, it is the driver which has the lowest impact on retirement success. (Retirement Success: A Surprising Look into the Factors that Drive Positive Outcomes By David M. Blanchett and Jason E. Grantz, p.1)
The graph below, from the above report, illustrates the relative importance of retirement considerations.
The key take-a-way is this: no matter your age, invest in your company’s retirement plan or 401(k) to the extent you can affordably do so now, so you can take advantage of tax-deferral (you can deduct your contributions from current taxes, and pay taxes later at a lower retirement income rate), company matching plans, and interest compounding.
And, the earlier you begin investing, the more you benefit, as the chart below illustrates.
What If I am Over 50, and Don’t Have Retirement Savings?
What if you are one of a growing number of baby-boomers without retirement savings or a pension? Don’t worry. You can put into practice 5 things right now to improve your retirement future. But again, start saving now. Click this link for an in-depth review of each item.
- Start Saving Now
- Ditch Your Debt
- Delay Retirement
- Begin a Side Business that Can Begin Paying You in Your Mid-60s
- Develop Multiple Revenue Streams
It has never been as important to invest in your retirement as it is today – really. Take advantage of your company’s 401(k) plan, a Roth IRA, or a personal IRA, and know the rate at which you save is by far the most important factor in your personal financial future.
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