But first, be sure to have enough cash to pay for up to six months’ worth of living expenses, in case an emergency arises. If you set up a retirement account and then raid it for emergency expenses, you may have to pay taxes and a penalty.
Once you have emergency savings, start funding a 401(k) if your employer offers one, especially if the company matches some of your contributions. When you miss out on a 401(k) plan that matches, you’re essentially giving away free money. In 2017, you can contribute up to $18,000 in a 401(k).
You also can open an individual retirement account, or IRA. In 2017, you can contribute up to $5,500.
If you can’t save enough to maintain both a 401(k) and an IRA, go for the 401(k) because contributions are automatic, pretax and subject to matching.
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Your 30s: Consider a Roth, adjust asset mix
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In your 20s or 30s, you’ll want to consider a Roth IRA.
Your contributions won’t bring the tax deduction you’d get with a regular IRA. But when you withdraw money from a Roth IRA during retirement, that’s tax-free. Withdrawals from a regular IRA are taxed as regular income.
So if your tax rate is likely to be higher in retirement than it is now, you’re better off with a Roth IRA.
When it comes to allocating your retirement investments, try to put at least 60 percent in stocks during your 20s and 30s, if you can handle a little risk.
If you are unwilling to stomach losses, don’t put everything in stocks. Check out CDs and other safer investments. The worst thing you can do is buy stocks and then sell them for a big loss.
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Your 40s: Stay focused on the long run
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Many people buy a home when they’re in their 30s and 40s. It’s important to remember that your house is not part of your retirement plan, says Mick Heyman, an independent financial adviser in San Diego.
“I haven’t seen too many times that somebody buys a great home, sells it at 60 and then lives off the profits,” he says. So don’t spend so much money on a home that you can’t afford to save for your retirement as well.
You also must be realistic in providing for your children. Don’t spend so excessively on your kids that you neglect your retirement savings goals. That may even mean putting retirement plans ahead of your children’s college.
After all, tuition money can come from many sources.
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Your 50s: Capitalize on catch-ups
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The 50s are the peak earning years for most people, so it’s even more critical to save. The government gives you some assistance, allowing increased contributions to IRAs and 401(k)s through “catch-up provisions.”
For IRAs, people 50 and older can contribute an extra $1,000 this year — $6,500 in total.
For 401(k) plans, participants 50 and older can put in an extra $6,000 — $24,000 in total.
Your 50s also are a good time to opt for more safety in your asset allocation, experts say.
“Somewhere in your 40s and 50s, you want to transfer to more conservative stocks, and make sure you aren’t all in stocks,” Heyman says. “Start having 20 to 30 percent in bonds.”
Shift the focus of your stock holdings toward dividend-paying blue chips. They offer safety and income payments that you’ll appreciate during retirement.
This is the decade in which you may well retire, which means you’ll begin withdrawing from your retirement funds.
A traditional rule of thumb is that you can cash out about 4 percent of your portfolio in each year of retirement. But with low interest rates limiting the amount of income your portfolio will generate, 3 percent may be more appropriate now.
Ideally, you should have two years’ worth of living expenses in cash to avoid having to dump your investments when markets are weak.
Adjust your asset allocation so that bonds account for a larger part of your portfolio, given your need for safety and income.