Financial security doesn’t just happen. It takes years of planning and commitment, and the sooner you start, the better prepared you will be in your later years.

Sunset over Amsterdam (Frontpage)
Werner Kunz via Compfight

According to the United States Department of Labor, the average American spends over 20 years in retirement, yet less than half of Americans know how much they need to save in order to do so. In fact, many Americans completely neglect invaluable resources such as their 401(k) or employer contribution plan, which means they are essentially losing money every month.

It is never too early to start saving. Here are five ways to prepare for retirement:

Know your retirement needs

Experts estimate that you will need to save at least 70 percent of your total pre-retirement income in order to maintain your standard of living when you stop working. For lower earners, this number can jump to as high as 90 percent. The key to retirement is to plan ahead. Get a general idea of how you want to invest your money, how much you would like to save and what it will take to do so, and stick to it. If you make saving a priority early on, you will have more flexibility when investing, which could give you better long-term benefits.

Contribute to your employer’s retirement savings plan

If your employer offers a retirement savings plan, such as a 401(k), sign up and contribute as much as you can, especially at a young age. Not only will you have lower taxes as a result, but also your employer might throw in more and you will be less tempted to spend excess money. Find out everything you need to know about your plan, such as how much would you need to contribute to get the full employer contribution and how long you need to be on the plan to receive full benefits.

Open an Individual Retirement Account

You have two options when opening an Individual Retirement account (IRA)—traditional IRA or Roth IRA. Depending on what type you choose, you can invest up to $5000 and receive different benefits. Like a 401(k), IRAs are advantageous for tax purposes and will reduce the likelihood of frivolous spending. You can even set up your account to automatically withdrawal a certain amount each month, so you will never see the money.

Buy income producing assets

That flashy car might seem like a good idea at first, especially with some excess money in the bank, but you will probably regret it later on. Instead, put that money toward income producing assets, such as stocks or a house. With dividend stocks, for example, you will receive dividend income and the stocks might gain in value, increasing your initial investment even more. If you put a down payment on a house, you can rent out some rooms to generate income to help pay your mortgage.

Avoid consumer debt

Avoiding debt, especially at a young age, can be difficult, but it’s not impossible. While young people tend to spend money more frivolously than the average American, it is extremely important to spend less than you earn. Otherwise, you could wind up with credit card debt, which can negatively affect your credit score and chip away at your income.

It’s not easy to think about retirement while you are in your 20s, but if you do, your 50 year old self will grateful that you did.

This guest post was written by Patrick Rafferty, a business professional in the New Orleans area who writes for the Metairie Banks.

Digiprove sealCopyright secured by Digiprove © 2013 Mitch Mitchell