Compound It! The best retirement savings advice you'll ever get
If you're a young professional, you may still have decades until it's time to retire. The sooner you start saving, though, the better. The power of compounding interest will make it easier to accumulate enough wealth to quit working for good when you're ready.
But in the meantime, there's one thing that may help you more than anything else in achieving your retirement savings goals: don't check your balance.
Don't check your retirement savings balance too often
If you have 25 years or more to go before you retire, there's going to be a lot of ups and downs in the financial markets between now and then.
Even if you understand that, though, watching it happen in real-time can be a stressful experience. There's a good reason for that anxiety, too. According to the Urban Institute, Americans had collectively lost $2.7 trillion by the time the markets bottomed out at the beginning of 2009.
Ten years later, the financial markets have not only made up what they lost during the Great Recession, but they've also experienced gains beyond pre-recession levels. But as the crisis began and retirement savings balances were dropping, people who were constantly assessing the damage may have been tempted to withdraw their funds to stop the bleeding. (And some likely did.)
As the economy recovered and retirement savings accounts did too, the people who raided their retirement accounts didn't recover along with them. What's more, taking an early withdrawal from your retirement savings account can result in a penalty of 10% of your withdrawal amount, plus income taxes.
So if you withdraw $10,000 and have a 20% effective tax rate, you'd lose 30% of your withdrawal when you file your taxes for the year.
Avoid the temptation altogether
Whether or not we see another recession like the one that happened in the late 2000s, there will always be significant market downswings followed by upswings. But over time, the market has always recovered and moved to the next level before seeing another downturn.
If you avoid checking your retirement account balance, especially during downturns, you won't have the potential temptation of making a major financial decision based on emotions rather than an understanding of the market's history.
On the other hand, if you constantly check your balance during a downswing and give in to the temptation to withdraw your savings, you could derail your retirement plan entirely.
Now, this doesn't mean you should never check your retirement balance. You should receive a statement from your brokerage firm every quarter with a balance, and checking that can give you an idea of whether you're on track to achieving your retirement goals. But checking more frequently than that could be dangerous if you're not careful.
Practice dollar-cost averaging
In addition to ignoring your current retirement balance, it's also a good idea to use an investment technique called dollar-cost averaging.
This method focuses on contributing the same amount of money to your retirement savings each month, regardless of how well the market is doing. This means that your monthly investment purchases more shares of a mutual fund or other financial security during recessions and fewer shares when the market is doing well.
By focusing on the amount you're saving each month instead of what you're buying, your retirement investments can grow over time, weathering and bouncing back from downturns along the way.
Of course, this is just one writer's opinion. For legal advice about your retirement planning, be sure to speak to a qualified financial professional.
Compound It! is your weekly update of achievable, effective, no-nonsense HSA saving and investment advice, delivered by people who make it work in their own lives. For the latest info about your health and financial wellness, be sure to check out the HSA Learning Center, and follow us on Facebook and Twitter.