Retirement is a goal that every person dreams of. It’s the chance to sit back and enjoy your life after decades of hard work. Yet, retirement is no longer a guarantee for every person. Thanks to the struggling economy and changes to social security, not everyone will be able to retire.
If your future plans include retiring, you need to make a concrete plan on how you’ll accomplish it, and start saving money now. Putting off saving only makes it harder to retire, and at some point, even impossible. Here are some things you need to do if you want to retire at a reasonable age.
Table of Contents
Why You Should Start Saving for Retirement Today
Even if you don’t have a 20 year financial plan, or haven’t yet mapped out how much money you’ll need to retire, start saving today. If you have an employer who offers retirement benefits, like a 401K, take advantage of it now. The reason you want to start saving today? Compound interest.
Saving for retirement is a bit of a misnomer. What you really want to do to maximize your retirement money is invest, or save your money in accounts that will grow (or appreciate) over time. Choosing the best investments for your retirement savings is the real trick. That’s where compound interest comes in.
If you are saving using a retirement fund, like a 401K or an IRA, once you’ve put money into it, that money begins to gather interest. Then, that interest is added to your account principal, and your new (larger) principal amount gains interest again. In other words, the interest helps you earn money even if you don’t continue to save. Basically, the money grows at an accelerated rate. The longer you let the money sit and grow, the more interest you’ll earn.
The sooner you can get money into a retirement account, the sooner you’ll start earning. By making regular contributions, you can make sure your money constantly grows both from the compound interest, and by your own savings contributions too.
Best Ways to Save for Retirement
There are dozens of different ways to save for retirement. Finding the right one for your situation is the key to being able to retire when you want to. Major factors that influence what style of account to go with include what kind of benefits your employer offers, and how much time you have until you are at retirement age. Of course, keeping compound interest in mind, you’ll want to find retirement accounts that offer the best rate of returns. Again, that usually means investment accounts, rather than simply opening a savings account at the bank or credit union.
401(k) Account
The most common style of retirement savings account is the 401(k). This style of account is set up by an employer that allows employees to have a portion of their paycheck go directly into the retirement fund. The employer can also contribute a specific amount to the account, typically matching what the employee contributes to a specific percentage.
With a 401(k) fund, you can actively manage what investments are made and how aggressively you want to grow your money. That includes whether you want to put the money into stocks, bonds, or both, and even choosing specific options within each. Another element to consider with a traditional 401(k) is that all contributions are tax deferred, meaning the money comes out before taxes are taken from your paycheck. This can reduce the total amount of income you earn subject to income taxes each year. When you do finally withdraw money from your 401(k), those withdrawals will be counted as income, and subject to income tax.
Traditional IRA and Roth IRA Accounts
IRA stands for individual retirement account. There are two types of IRA, a traditional account and a Roth IRA.
The major difference between the two comes down to paying taxes. If you believe you’ll be in a lower tax bracket now than when you retire, you’ll want to go with a Roth IRA. You pay income taxes on the money going into the IRA now and then when it’s time to pull it out, it’s tax free. On the flip side, if you think taxes will be higher now (as in you are in a higher tax bracket) than you will be when you retire, a traditional IRA is for you.
There are other smaller differences too, like how old you have to be in order to pull out money and whether you are eligible for a specific IRA. Be sure to do research on both before choosing an IRA for you.
Take Advantage of Employer Match Contributions
If your employer offers retirements benefits, especially with a 401(k), it’s likely they offer a matching contribution benefit. Take full advantage of this, as it’s basically free money to help you retire.
Many companies that offer matching contributions have a limit on how much they will give. Some will contribute 50 cents for every dollar you invest in the fund, while others will match you dollar to dollar, up to 6 percent of your total paycheck.
If you are serious about retiring, get as much retirement money from your employer as possible. If they have a matching program, invest the maximum qualifying amount to get the most money into your retirement account.
Use Catch-Up Contributions If You’re Nearing Retirement Age
If you are getting close to retirement age, but don’t have nearly enough saved to say adios to your job, it can get discouraging. It might even feel like you’ll never retire. But there is a way to catch-up and quickly build your retirement fund.
If you are over 50, you can contribute even more of your paycheck towards your retirement. Typically, there is a limit of how much money you can contribute to any specific type of retirement fund, but those who are eligible can invest extra money. This can range from $1,000 to $6,000 depending on the retirement fund.
Setting a Retirement Goal and Making a Plan
Whether you are 22 and just entering the workforce, or 59 and a workplace veteran, you need a plan on how and when you’ll retire. Even if retirement is a far off pipe dream, having a goal and creating a plan is essential. That way, you can start saving now.
First, start with an age you would like to retire. Then, choose a reasonable lifestyle you want to have when retired. Are you hoping to travel the world constantly and have a luxury home? You’ll need a strong retirement fund to pay for it. Just want to rest in a reasonable apartment and spend your time saving money? You won’t need as much stashed away for that.
When you have your ideal age and lifestyle, start planning. Figure out how much money you’ll need to retire and stay retired, and find out which solution will be best for you. That includes what kind of retirement accounts you need, how much you will need to contribute monthly and annually to the accounts, and how much money you need to make until you retire.
Additional Tricks to Boost Your Retirement Savings
There are little ways you can save money while still making sure money is constantly flowing into your retirement accounts. Use most (or all) of these tricks to get the most money out for retirement.
Automate Your Accounts
In today’s electronic world, it’s possible to set up your contributions to savings and retirement accounts automatically. That way, you don’t have to constantly remember to set aside money for contributions, or to put funds into a savings account.
It also forces you to make sure you have money available for savings instead of blowing it on things you want, but don’t need. That way, personal desires like buying a new TV don’t get in the way of being able to retire.
Manage Your Budget and Control Your Spending
The less money you spend, the more you can save for the future. Whether that extra money goes into a retirement account or just a normal savings account, it’s still important to save where you can.
Create a monthly budget and stick to it. Make sure you first have money to live and pay all your bills, then set aside money to go to different savings accounts, then plan out extra purchases. Make sure your needs both now and for the future are met before you start buying extra stuff. This might mean living frugally for awhile, but that extra money can be a huge help to your savings.
Don’t Spend Bonuses or Windfalls
Sometimes, extra money just falls in your lap. That might be because you are working hard at your job, or a deceased relative left you money or other assets in a will, or you won some money from the lottery. It might feel like the perfect opportunity to buy that 80 inch TV you’ve always wanted, or even get a whole new wardrobe.
Take a moment to think about it though. Spoil yourself a little bit, but consider a better way to utilize that extra cash. Are you hitting your maximum yearly contribution limit on your retirement accounts? Maybe look at putting this extra money there. Put it into your emergency savings, or create rainy day fund. Remember, compound interest can take your money and transform it into even more money for the future.
Make Sure You Understand Your Healthcare Benefits
As you grow older, you are going to need to visit the doctor more often. That means getting more medical bills, paying for medicine, and the need to understand your insurance.
It is your responsibility to understand your insurance and what benefits you have. Make the wrong choices, like picking a healthcare provider outside of your insurance’s network, and you’ll be paying a lot of money. By knowing what your insurances covers and utilizing the system, you can make sure to minimize healthcare bills and stay healthy.
Avoid Unnecessary Debt and Protect Your Credit
The more bills you have to pay, the less money you can save. Some debt is part of life, such as car and home loans, but a lot of debt can be avoided. Don’t take on debt you don’t need as it could put your credit at risk.
When it’s time to retire, your credit is an invaluable tool. While retired, you are on a fixed income, meaning you don’t have much financial flexibility. You can’t work overtime to pay off extra bills while retired. Yet life still happens. Cars break down, homes have to get repaired and big costs still come. That might mean not being able to pay for it all in one lump sum like when you were working, but if you have a good credit score, you can pay for that big bill over time. Protect and grow your credit now so you have extra financial flexibility when retired.
Don’t just dream of retiring, make plans to make it happen, and then follow that plan. Actively work towards the retirement you want and make sacrifices now to accomplish it. The earlier you start saving, the more money you’ll have when you do retire, and the less sacrifices you’ll need to make when older. It might even be possible to retire early if you save enough and the economy goes your way.
Image Source: https://depositphotos.com/
Keep Learning
