Retirement seems a long way off. But even if you are just starting your career, there are good reasons to start thinking about how you’ll afford your golden years.
Jerry L. Love, CPA/PFS, CGMA, advises young professionals to start saving early. “Saving during the first 15 to 20 years of working can have a huge impact on the amount available for retirement due to the impact of compounding returns,” said Love, who runs a firm in Abilene, Texas. “Unfortunately, many of my clients come in for retirement advice in their 50s with little to nothing saved. Starting at that age, you won’t have much at retirement, even if you start putting half of your money away.”
Young CPAs undoubtedly understand the value of money better than most people. But depending on your area of specialization, you too may have some questions about the best strategies to prepare for retirement. Here is what CPA financial planners recommend:
Seek out resources. Retirement calculators can help gauge how much money you’ll need to retire at different ages assuming different investment yields, inflation rates, and life expectancies (see Bankrate.com’s Retirement Calculator Center). You can also use apps and online calculators to estimate your expenses and life expectancy.
If you’re not a CPA personal financial planner, consider consulting with one as they can provide more than just investment advice. They can help with long-term planning centered on your specific situation. For instance, public accountants who plan to be partners one day—and therefore will have an ownership stake in a firm—will likely have a different long-term retirement strategy than a CPA who expects to spend his or her career as an employee in business and industry.
Chris Benson, a CPA and financial planner at L.K. Benson & Co., suggested that it is less important for young CPAs to focus on a specific dollar goal for retirement savings than it is to think about ongoing expenses and savings. Once you are closer to retirement age, he said, it will become easier to calculate specific expense and savings amounts. “It’s hard, if not impossible, to plan now for the next five to 10 years and what your expenses will look like that far down the road,” he said. “It’s more important to focus now on creating a budget, understanding where your money is going, and trying to increase savings each year.”
Max out your 401(k). Contributing the maximum amount to take full advantage of employer matching provides you with more tax-free “free money” that will accrue over time along with your contribution. (However, note that if you maximize 401(k) contributions, you may not have as much money left to save in other ways.)
“Putting away money in my 401(k) is a way to make sure that I am saving, and small amounts put away for retirement early in life can turn into thousands of dollars later,” said Dylan Sagastume, an accounting student at Pace University and a USI Insurance Services accounting intern.
It’s also important to save early, because an unforeseen event—health or family problems, for instance—might prevent you from saving for an extended period of time, according to Alicia DeRicco, who also is a USI accounting intern.
Keep living expenses down. Keeping living expenses low is important, especially if you want to retire early. “Lifestyle creep,” or spending more as you make more, is an issue that young professionals constantly have to be cognizant of. Switching from a spending mindset to a saving mindset and establishing a financial plan can help, Love said.
Pay down your student loans. Part of the budgeting process is to calculate how much money is available for loan repayment while still leaving room for savings. Depending on the financial particulars of your loans and 401(k), it might be better to maximize any 401(k) match first, then use the remaining money to pay down loans. “Live poor until you pay off your student loans, and get debt-free as soon as possible,” said Jason Scott, CPA, a senior accountant at USI.
Save on the big things, not just the small ones. Benson warned that people tend to focus too much on saving on little things right now, such as lunches and coffees. Instead, he said, they should think about how to save more on big-ticket items that will affect their finances in the future. For example, if you get a raise, don’t spend the money on a new car, which will raise your expenses. Instead, “set aside some of it for increasing your 401(k) savings,” Benson said. That way, “each year, you’re saving more and keeping your baseline expenses lower.”
Invest your money. Saving is crucial, but your money won’t grow enough sitting in a bank account. That’s why you should consider investing in the stock market. Diversification is important—for example, your portfolio might include diversified mutual funds, stocks from more than one industry, both large and small cap funds, and international and emerging markets. You can also consider buying low-cost, exchange-traded index funds, in addition to individual stocks. Note that investing in the stock market is best for people who have money they won’t need to use right away.
Maria L. Murphy, CPA, is a Wilmington, N.C.-based freelance writer.
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