Are you like the average American citizen? Does your retirement account have less money in it than you owe on your credit cards? Sadly, you're not alone. Most of us live paycheck to paycheck and don't save for retirement. But don't despair, saving for retirement is easier than it looks and there's a solid strategy that will work and help you weather the ups and downs of the stock market too!
- Start by contributing enough to your 401k plan to max out your employer's match. If you don't, you're leaving free money from your employer on the table. Are you paid enough? I know that I'm not! Get a small pay raise from your boss by enrolling in their 401k plan and putting 5% or 6% of your paycheck in it every month! It's quick, it's easy, and it will pay you back when you retire!
- Decide how long you have until you retire. I'm planning on retiring in 20 years so I have a lot of time to save for my retirement and time is the secret to saving for retirement.
- Then take that number of years, multiply it by 2, and add 30 to it. For me that's 20 x 2 = 40 + 20 = 60.
- Put that percent of your retirement into stocks and put the rest into bonds.
- Every 4 months rebalance your retirement so that you have the planned amount in stocks and the planned amount in bonds. That way you'll be selling high and buying low.
Unless you're a financial professional and you monitor the market daily, this is the most reliable long term solution for building your retirement savings so that you'll have a comfortable retirement. And this technique even beats out some of those so called financial "professionals" over time!
The reason you want to decrease the amount of your retirement that you have in stocks and increase the amount that you have in bonds as you get closer to retirement is to protect yourself from a stock market crash. Stocks grow over time, but if you have too much in stocks and the market goes down suddenly right before you retire you won't be able to recover from it without working longer than you want to work. So as you get closer to retirement you need to move more of your money out of stocks and into bonds.