1. Imagine this: You, not working
You can’t plan for your retirement unless you know where you’re going. So start thinking about your retirement lifestyle and what you want to do after you’re done working. Unless you won’t be done working: Maybe you want to start a business? Or do you want to travel, volunteer or become a professional grandparent? Maybe you’ll build a cabin on a lake?
You can never start envisioning your retirement too soon. Even if you think your goals might shift in the years ahead, dreaming about them today gets the conversation started and helps you plan.
2. Start early, save a lot
Once you know what you want to be doing, it’s time to figure out how much you need to do it. Run some numbers using the Retirement Planner on ameriprise.com. Let’s say you’re 35 years old, earn $100,000 a year and have $200,000 in your 401(k). You might determine you need $2 million saved up by the time you’re 65. To get there, you’d need to invest $550 per month and earn a 7% annual rate of return.
3. Save money at every opportunity
With rising retirement costs and people living longer, there’s a chance you’ll need a lot more money than you think in retirement. So save as much as you can during your earning years. Workplace-sponsored 401(k) plans let employees under age 50 save up to $18,000 each year, with an additional catch-up contribution of $6,000 per year for those age 50 and above. Plus, your employer may throw in a match.
Aim to save at least 15% of your gross pay. Not there yet? Increase your retirement savings contribution with every pay raise, before you get too used to that higher paycheck.
4. Go beyond the workplace
There are other tax-savvy ways to save for retirement, too. Consider opening a Roth IRA, which allows for after-tax savings and tax-free withdrawals when certain conditions are met. This can help you hedge against the possibility of future tax increases, so you don’t need to fret as much about taxes during retirement.
Another option to consider: A traditional IRA, which can help you further broaden your retirement savings plan and give you more control over your investment selections. IRAs can give you access to investment options you don’t have at work, such as municipal bonds, real estate investments, commodities and emerging market funds.
5. Save strategically
Don’t let market swings throw your portfolio out of whack. Determining how to best allocate your savings between various kinds of assets — including stocks, bonds and cash — can be a powerful way to keep your retirement savings growing. Spreading your savings across various sectors and asset types can help soften the effects of big market fluctuations so you can worry less.
Dollar-cost averaging — putting fixed amounts into investments on a regular basis, regardless of market conditions — can also help. And rebalancing your portfolio can make it possible to lower your exposure to investments that have recently outperformed the market while increasing exposure to those that may be ready to grow. These strategies can be tricky, so make sure you ask your advisor for help.
6. Steer clear of emotional investing
As investors, our emotions tend to follow market cycles. When markets perform well, we tend to become euphoric and pour money into stocks. When markets turn down, our emotions change and can cause us to pull out of the stock market just as it reaches its low and miss out on potential gains as it rises again. The lesson: emotions can cause us to do just the opposite of what we should do.
7. Leave your worries behind
Even if you build a smart saving and investing strategy, unexpected events can occur. You could experience an illness that prevents you from working and earning an income. Or your home could be damaged in a storm. You need to protect yourself against the risks in today’s world. Your advisor can help evaluate your personal situation and line up the right levels of protection, whether it’s disability income insurance, long-term care coverage or auto, home and life policies. With sufficient protection, you can focus on the fun parts of planning for the future without having to worry as much about all the “what ifs” along the way.