8 Rules of Thumb for Saving for Retirement

8 Rules of Thumb for Saving for Retirement
Starting early is one of the keys to saving for retirement.

Don’t Withdraw Early

Starting early is one of the keys to saving for retirement.

Making early withdrawals from your retirement account hurts your nest egg. When you take withdrawals from many types of retirement accounts before you turn age 59 1/2, you incur a 10 percent penalty and must pay income tax on the withdrawal. You also lose the ability for that money to grow through compound returns. In some cases, you may need to take approved withdrawals, but limit those to as few as possible.

Perform Research

Perform basic research about available investments so that your financial future is not totally in the hands of someone else. Research retirement account rules regarding your contributions and withdrawals. Determine whether your employer offers a retirement plan and get the details on it. Research the rules for Traditional IRA and Roth IRA investing, which is something you might do in addition to your employer's plan. Investing in your education helps you make wise choices regarding your retirement savings.

Know Your Retirement Needs

Before you start saving for retirement, know the amount of income you will need to live on during your retirement years. The best way to figure this out is to think about the amount you need to take care of your annual expenses. With an end goal in mind, you can calculate the amount of money you need to save monthly. You can use the Vanguard calculator links in the Resources section to find rough estimates for your situation.

Diversify Assets in Your Plan

Your retirement account should possess a diversity of assets. Your asset allocation should depend on your age and retirement needs. If you are younger, you can invest more in stocks because there is time for your portfolio to recover in the case of losses. As you age, more of your assets should move into bonds and other income-producing assets that are not as volatile as the stock market.

Start Early

Your retirement account takes advantage of the concept of compound interest, which allows your investment income to earn more income over time. Saving for retirement as early as possible allows you to fully benefit from compound interest. Essentially, your money enjoys more time to compound into more money.

Maximum Contribution

You receive several benefits from maxing out your retirement plan. Many individual retirement accounts allow you to take tax deductions on your contributions. For employer-sponsored plans, many employers match your contributions when you make the maximum contributions to your plan.

Rebalance Your Account

Over the years, the assets in your retirement account experience gains and losses, changing your asset allocation. Rebalance your retirement account periodically so that you remain diversified.

Estimate Social Security Benefits

Calculate your Social Security benefits in advance to know the best time to take them. Even after you reach eligibility, you can delay taking your benefits until a later date. Your monthly benefit amount increases the longer you delay taking your Social Security benefits. You can get a rough estimate of your projected benefit through the Social Security link in the References section.