Most people agree that you are never too young to start saving for retirement. In fact, it’s one of the most crucial savings accounts you can begin, along with a house budget or college fund. And the earlier you start saving, the better off you’ll be in the long run.
But in the wide world of banking and money, where do you begin when planning ahead for retirement? Read on for 12 of the best ways to successfully save money for your retirement.
How Much Money Should You Save for Retirement?
It’s no secret that the cost of living has consistently risen since the last generation was able to retire. So, it can be difficult to nail down precisely what you need to save to retire at the end of your career comfortably. In fact, an exact number might be a myth!
Some financial experts recommend saving around 15% of your salary for future retirement before tax. However, this number can change drastically depending on your situation, future prospects, and location.
But arguably, the best method for determining how much money you need to save for retirement is balanced between how old you are and when you want to retire. This will indicate the feasible amount you can accomplish by retirement age.
A straightforward calculation is to multiply your current annual spending by 25. The number you get will be the minimum amount of savings you should have in retirement, based on living off 4% of it every year after retiring.
1. Start Today
It’s best to get a jump start on your retirement savings, so starting as soon as possible is ideal. This is especially important if you are just beginning your retirement savings journey.
Putting aside even a little bit of money before you have an entire retirement savings scheme set up is still beneficial, as you can re-invest it when you have a retirement-specific account, 401(k), or other investments.
Even putting aside $75 to $100 per month can significantly help your eventual retirement fund, especially if you begin in your early 20s to 30s.
2. Establish Your Goals
While you might not have an exact number for your retirement fund in mind, it’s crucial to set goals for your savings. By establishing manageable savings benchmarks for your eventual retirement, you make it achievable and rewarding.
Figure out monthly, bi-annual, and yearly goals to reach and make it easy to see your progress with percentage charts and other useful visuals. These are simple to produce through a personal retirement calculator and may be available through your bank’s investment team.
3. Invest in an IRA
An IRA, or individual retirement account, is a great way to build your retirement account. These accounts can give you flexibility in contributions and more control over your funds and are available in two specific forms of IRA.
Traditional IRA Vs. Roth IRA
This IRA account lets you deduct your income from taxes and defer any payable income tax until retirement, giving you access to your full salary. Additionally, your investments can be tax-deductible, depending on your salary.
However, the main drawback of a traditional IRA is the contribution limits. Because they are individual savings accounts, IRAs contributions cannot be matched by an employer and have lowered deferral limits for personal use.
While maintaining many of the main characteristics of a traditional IRA, Roth IRAs are NOT tax deferrable for initial saving and later taxation. But on the plus side, your investments are not taxed if you make the proper withdrawals before you turn 60.
Roth IRAs are great for high-growth investment plans that might gain massive tax margins should you invest in a different type of account. You can add more money to Roth IRAs than traditional ones but are limited based on the number of contributor filers.
4. Open an HSA
Planning for your retirement should also include health care considerations. Because doctor visits, prescriptions, and specialist care can become incredibly expensive over time, you should prepare a retirement fund for any health complications in the future.
Health savings accounts (HSAs) offer tax-deductible contributions that carry forward indefinitely, with the eligibility for future investment. Additionally, withdrawals to pay for qualifying medical and healthcare expenses are tax-free.
Though you can access an HSA through your employer, private individuals can also open one. Depending on whether you are single or contributing on behalf of your family, the annual fund limits will vary.
5. Contribute to a 401(k)
Possibly the most well-known type of retirement savings account, having a 401(k) is a great way to contribute proactively to your future retirement. A good deal of employers offer a traditional 401(k) for their workers, and it is wise to enroll if you are eligible.
401(k) plans allow a portion of your paycheck to go directly into the investment account without worrying about doing it yourself or straining your monthly budget.
In addition, 401(k) account contributions are calculated from your after-tax income, and contribution limits are set not by your salary or company position but by the Internal Revenue Service that administers these types of accounts.
6. Meet Your Employer’s 401(k) Match
A further benefit of having a company 401(k) is the ability of your employer to also contribute to it, outside of a portion of your monthly salary. And if an employer does offer to contribute, ensure you can match the amount to take full advantage of it.
7. Automate Your Savings
There are many benefits to making your savings contributions automatic after each paycheck, and adding to your retirement account is no different. It also removes the temptation to spend that money directly after payday.
By setting up your bank account to make regular, scheduled deposits, you don’t have to remember to do it yourself. This includes automatically setting aside a portion of any raises or bonuses you get by adjusting your contribution rates to accommodate the extra money.
8. Budget Yourself
A general tip for managing your finances is to make sure that you are not going overboard on spending every month. Limiting your excess spending inevitably gives you more money to contribute to essential savings, like retirement.
Make and review a monthly budget for you and your household. Take salaries, insurance payments, mortgages, student loans, monthly expenses, and other aspects into consideration. Your budget should be firm but not uncomfortable to live with.
9. Set Extras Aside
If you find yourself in possession of extra money, resist the temptation to spend it. Instead, save your windfalls and use some or all of the amount to contribute directly to your retirement savings.
You can always put aside some of this extra money to save for a vacation or a shopping spree, but most should be safely invested in retirement funds. Treat any windfalls as a bonus and apply them to your future retirement—you will be thankful in the long run!
Additionally, if you have an unexpected amount of excess cash, you can opt to keep it set aside for retirement in that form. Some people swear by having a small nest egg of cash ready for them in retirement, waiting securely in your bank’s safe deposit box.
10. Delay Social Security
Instead of cashing in your Social Security payments as soon as you are eligible, you can defer receiving them until retirement, greatly increasing the amount you will receive later in life.
Each year that you delay your Social Security payments after turning 62 will actually increase your eligible monthly benefit. This scheme no longer applies after the age of 70, but you can have amassed a considerable amount of money in those eight years.
11. Opt for a Private Pension
If your company does not offer access to an employee pension, setting one up for yourself can be worthwhile. Private pension plans are good for anyone self-employed or otherwise cannot become enrolled in a corporate pension scheme.
While you can easily save money for your later retirement with a private pension, it can become confusing to split your investments over a variety of savings accounts. But in general, private pensions still allow tax rebates, ample contributions, and fund security.
Private pensions are easy-to-use and require monthly or lump-sum payments to a provider who will then invest your money in the best possible avenue according to your goals and the current market. This gives you plenty of flexibility in allocating your funds.
12. Make Other Investments
If you have the earnings to spare and sink into other financial avenues, then you can look into a variety of other investments. These include exchange-traded funds, index funds, or mutual funds and other bond or market funds like an S&P 500.
Additionally, you can look into purchasing stocks that will contribute to your retirement portfolio and hopefully provide you with a high return when the time comes. Dividend stocks can be a good means of income for retirees, so investing early is beneficial.
Each type of investment does come with different inherent risks—some more volatile than others. So, it is important to do your research, talk to financial professionals, and establish what kind of investment is appropriate for you and your retirement goals.