Saving for Retirement in Your Early Years

As a parent of two young adults, I am keenly interested in how/ whether or not they are saving enough money for retirement. Despite retirement being decades away, planning and saving early will make a big difference in their long-term financial security. Here are a few tips you can share with your children and other young people in your life.

· Start saving as early as possible. This can be challenging if you recently graduated with student loan debt, a car payment and/or high rent. But investing in the market should be an integral part of a monthly budget.

· Understand your employer matching programs. Check if the company offers a defined contribution plan (401(k) or 403(b) plan) where you can set aside pre-tax or post-tax Roth dollars for retirement. Most companies “match” a percentage of your contributions; this is essentially free money but only if you participate in the plan. No one should leave money on the table! Review the vesting schedules to understand how long you must remain at a company to keep the employer matching contributions.

· Contribute as much as you can. Try to save at least 15% of your salary and bonus. As your earnings increase, try to save more, perhaps up to the annual IRS contribution limit ($23,500 for 401(k); $7,000 for IRAs) if you are under age 50 in 2025.

· Invest in something other than cash. Too many people contribute to a retirement account but never take the second step of selecting where to invest the cash. These contributions remain in cash for years earning little to no interest, and actually lose value due to inflation.

· Don’t invest too conservatively. Past performance cannot guarantee future results, but the value of the stock market tends to rise over time. Taking more risk offers possibility of higher returns over the long term. There will be market downturns, but in your early working years, you will have time to recover from market dips. Consider target date funds (aligned to your expected retirement year) or asset allocation funds (aligned with your risk tolerance) If you are not comfortable selecting investments.

· Find other retirement plans if you do not have access to an employer-sponsored retirement plan. You may be eligible for other types of plans - a solo 401(k), traditional IRA, SEP IRA (Simplified Employee Pension Plan), and Roth IRA, depending on your source of earned income. These plans offer tax advantages, enable you to save money and potentially pay less income tax over time.

· If you have extra cash, invest in a taxable brokerage account. There are no contribution limits, but there are no tax advantages, either. Also, check if your company offers contributions to Health Savings Accounts or Emergency Savings accounts.

· Determine if you are eligible to contribute to a Roth IRA. Roth contributions are made with after-tax dollars, and qualified withdrawals (including earnings) can be tax-free under certain conditions. But eligibility to contribute to a Roth depends on your income. If you earn too much by IRS rules, you cannot contribute to a Roth. The limits change each year, so check every year to see if you qualify for a Roth.

· Avoid early withdrawals and loans from workplace retirement plans. Withdrawals are taxed as ordinary income. Withdrawals before age 59½ may subject you to a 10% penalty unless an exception has been met or you qualify for a hardship withdrawal. Interest is charged on loans taken from employer-sponsored retirement plans. If you leave your job, the entire loan may need to be repaid immediately, depending on your plan. If you can't repay your loan, you'll be charged ordinary income tax on the loan amount, plus a 10% early withdrawal penalty before age 59½.

Make time to discuss retirement savings and planning with the young people in your life. If you are not currently working with FPS, we would be happy to talk with you. Questions? We are here to help.

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Best regards,

Janet Rhodes Friedman, CFP®, CDFA®, MBA Janet@PlanWithFPS.com

617-630-4978

Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.