Our first step to saving for retirement is to define what we want our retirement to be. It will give context to our decisions about accounts, strategies, and investments later. We can get started by asking ourselves a few questions.
When should we start saving?
The best way to prepare for retirement is to start saving early and often because this gives our investments time to grow faster longer.
Even with small amounts, starting early and consistently adding to our account will build up sizable portfolios over time because of compounding.
How much do we start with?
Every account starts with $0 until we put money in it. We don't need to have any prior retirement savings to start contributing.
Many employers offer retirement plan matches where they contribute to our retirement plans when we do. We should put away enough to get at least all of our employer match each month if we can. Otherwise, we'd be leaving free money on the table.
How much do we need?
The amount we need to save depends on our lifestyle during retirement and roughly how long we will need our savings to last. Having an expensive lifestyle or a longer retirement will require more savings and riskier investments for greater returns. Otherwise, if we plan to work for a longer time and prefer to live more modestly, our contributions and investment decisions can reflect that.
When will retirement start?
The amount of time we have until we retire is known as our time horizon, and it plays a significant role in determining the appropriate strategies and investments.
How much risk are we comfortable with?
On any given day, our investments could be up or down. Riskier investments are like bigger rollercoasters, capable of rising or falling faster and further. Our risk tolerance tells us how much risk we are comfortable with - too much will make us feel nervous, while too little can cause us to miss our retirement goals.
We can create an investor profile based on our time horizon and risk tolerance.
Then, we can use it to make informed decisions about which investments and strategies will help us reach our retirement goals. We can find questionnaires online to guide us through this process.
Carefully think about how you would answer these questions when saving for retirement. However, your answers can and should change over time, so your investment choices will change with them. Re-evaluating each year, at least when a significant life event occurs, helps keep your investments aligned with your goals.
If you need more help, try using the SMART framework.