The Department of Labor recently issued ten money saving tips to utilize when saving for retirement. You may be thinking that saving advice from the government won’t be very good since the government itself is struggling with a massive debt burden, however, the tips offer some decent, common sense advice that doesn’t hurt to keep in mind when saving for the future.
DOL pointed out some facts about retirement planning as a basis for offering the advice. Fewer than half of Americans have calculated how much they need to save for retirement, yet the average American will spend 20 years in retirement. Many Americans report having saved very little for the future as well (see Can You Retire on $25k?).
The ten money saving tips offered are:
- Start saving, keep saving, and stick to your goals
If you are already saving, whether for retirement or another goal, keep going! You know that saving is a rewarding habit. If you’re not saving, it’s time to get started. Start small if you have to and try to increase the amount you save each month. The sooner you start saving, the more time your money has to grow (see the chart below). Make saving for retirement a priority. Devise a plan, stick to it, and set goals. Remember, it’s never too early or too late to start saving.
- Know your retirement needs
Retirement is expensive. Experts estimate that you will need about 70 percent of your preretirement income – lower earners, 90 percent or more – to maintain your standard of living when you stop working. Take charge of your financial future. The key to a secure retirement is to plan ahead. Start by requesting Savings Fitness: A Guide to Your Financial Future and, for those near retirement, Taking the Mystery Out of Retirement Planning.
- Contribute to your employer’s retirement savings plan
For federal employees, this would of course be the Thrift Savings Plan for those who are eligible to participate.
- Learn about your employer’s pension plan
Federal employees are either under FERS or CSRS, each of which offers different benefits. For more analysis on this, see The Best Annuity: FERS or CSRS? and CSRS Is Better Than FERS. Are You Sure?.
- Consider basic investment principles
How you save can be as important as how much you save. Inflation and the type of investments you make play important roles in how much you’ll have saved at retirement. Know how your savings or pension plan is invested. Learn about your plan’s investment options and ask questions. Put your savings in different types of investments. By diversifying this way, you are more likely to reduce risk and improve return. Your investment mix may change over time depending on a number of factors such as your age, goals, and financial circumstances. Financial security and knowledge go hand in hand.
- Don’t touch your retirement savings
If you withdraw your retirement savings now, you’ll lose principal and interest and you may lose tax benefits or have to pay withdrawal penalties (these penalties are significant and can be in the 40% range). If you change jobs, leave your savings invested in your current retirement plan, or roll them over to an IRA or your new employer’s plan.
- Ask your employer to start a plan
Obviously this doesn’t apply to federal employees since, as noted previously, the Thrift Savings Plan is the primary retirement savings vehicle already available to many federal employees.
- Put your money into an IRA
You can put up to $5,000 a year into an Individual Retirement Account (IRA); you can contribute even more if you are 50 or older. You can also start with much less. IRAs also provide tax advantages. When you open an IRA, you have two options – a traditional IRA or a Roth IRA. The tax treatment of your contributions and withdrawals will depend on which option you select. Also, the after-tax value of your withdrawal will depend on inflation and the type of IRA you choose. IRAs can provide an easy way to save. You can set it up so that an amount is automatically deducted from your checking or savings account and deposited in the IRA.
- Find out about your Social Security benefits
Social Security pays benefits that are on average equal to about 40% of what you earned before retirement. You may be able to estimate your benefit by using the retirement estimator on the Social Security Administration’s website. For more information, visit their website or call 1-800-772-1213.
- Ask questions!
DOL says these tips aren’t all encompassing and are meant to be a starting point, so you should never stop learning about the process and finding out about new ways to save for the future.