Angela from Fort Collins, CO asks: Hi Mitch, I’m a single mom trying to do the best I can to keep my finances in order with an emphasis on saving for retirement. What advice do you have for how I should prioritize my goals?
Mitch Reply: Thanks for writing, Angela. It’s admirable that you’re thinking about retirement planning, while you’re also shouldering all of the responsibilities of being a single mom. I’m sure you have plenty on your plate.
In my opinion, many folks shy away from retirement planning because they get the impression it is this big, complicated undertaking. You’ve got to think about IRAs and 401(k)s and investment choices and diversification all at once, and can seem overwhelming.
But as a result – and as underscored in a recent Retirement Confidence Survey (2017) – only 18% of American workers feel very confident that they’ll have enough money to live comfortably in retirement. In my opinion, that number is way too low.
Retirement planning does not have to be so complicated – in fact, you can simplify it greatly by just focusing on some core principles and processes. Here’s a framework for getting it done:
- Focus on Debt and Organization First – in my opinion, before you can start saving earnestly for retirement, you have to get your debt and finances in order. To me, that means making sure you have the best interest rate available on your mortgage and/or auto loan if you have one, and having no credit card debt. If you have credit card debt, consider transferring your balance to a 0% interest card and paying the balance off over the time allotted (i.e., if you find a credit card with 0% interest for 12 months, pay off your credit card over that 12 months). As far as organization is concerned, I think it makes good sense to make a list of where all of your accounts are, and consolidate accounts where possible. That way you have a clear sense of where everything is. For example, maybe Chase Bank has your auto, mortgage and credit card; and Charles Schwab has your retirement accounts, checking, savings, and brokerage accounts. Try to make your financial life as clean and streamlined as possible.
- Make it a Goal to Save Between 10%-20% of Your Income – If you make $50,000 per year, you should try your best to save $10,000 per year. That means socking away about $830/month, before taxes. It might sound impossible, but if you make it a goal it can almost certainly be done. The first place to save is in your company’s retirement plan – often times you can select how much you want to defer into a 401(k), so it can be as easy as electing 10% or higher if you’re comfortable. Talk to your HR department if you’re unsure of how to do this. Next down the line would be Traditional and/or Roth IRAs, depending on your situation. After that, you can save taxable dollars into an Individual brokerage account. The key is to try to hit that 10-20% mark.
- Diversify Your Investments, But Don’t Overthink It – if you’re 20+ years away from retirement, it probably makes sense to have a significant amount of equity exposure. It’s impossible to give you advice without knowing your specific situation, but if you’re in your 40’s and plan on working for at least 20 more years, you probably need about 70+% in equities. If your company offers a diversified US-stock option, like an S&P 500 ETF, that may very well do the trick on its own.
- Vigorously Follow Steps 1-3 For a Majority of Your Working Life – keep your debt low and your savings percentage high, and remain diversified with an emphasis on owning stocks, and you’ve found yourself a solid long-term strategy.
Once you get tip #1 situated and you start to get legitimate savings in the bank ($100,000 or more), that’s when you should talk to a financial advisor about professional advice for managing your investments.
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