HOW TO BETTER SAVE FOR RETIREMENT BEFORE IT’S TOO LATE

 

By Bhawna

Image source: fool.com

Whether you just started working or you are about to be retired means about to be done, you can still save for retirement. And you should save for retirement before it's too late. When planning for retirement, the good thing is that the earlier you begin saving, the better it is. But even if you started late or you are yet to start, you should pay heed to the fact that you are not alone. There are obvious steps by which you can increase your retirement savings consistently. Most of us should start saving 15% of our income if we wish to retire by age 62. Retirement planning is a multilevel process that evolves over time. To have a comfortable and fun retirement, you need to build the financial cushion that will fund it all. Retirement planning starts with thinking about your retirement goals and how much time would you take to meet them. Then you need to take a look at the types of retirement accounts that can help you to raise the money to fund your future. And as you save money, you are required to invest it to see it growing. So, here are some easy tips by which you can help increase your savings and then pursue the retirement that you are planning and dreaming for:

Focus on beginning today

Image source: fidelityinvestments.com

You have to start now. Especially if you are just beginning to put money away for retirement, start saving as much as you can now. The earlier you start, the better it is. Start today even if it is a little bit. Then saving will become a habit. The instinct to save will grow as you save money. You will start feeling good when you see that your account balance is growing. The concept of compound interest also comes when we talk about savings. The investor who starts 10 years earlier would have more at the time of retirement. It is simple.

Understand your time horizon

Your current age and expected retirement age are the grounds on which you need to create an effective retirement strategy. The longer the time from today to retirement, the higher the risk that your portfolio can stand. The main word is “long”, meaning at least more than 10 years.

Rein in spending

Image source: gobankingrates.com

Take a look at your budget. You can negotiate a lower amount on your car insurance. See where you can reduce spending. This will help you to save more and invest also. You can keep a cash flow calculator that can help you keep a check on where your money is going.

Set a retirement goal

Image source: medium.com

You should know how much you need. It will help you better understand why you are saving, and it can be rewarding also. You should set benchmarks along the way and then you will get satisfaction as you pursue your retirement goal. Use the Personal Retirement Calculator to help you determine at what age you may want to retire and how much you need to invest and save to do so.

Stash extra funds

Image source: 123rf.com

Extra money? Don’t just spend it. Every time you get an increase, increase your contribution percentage. Set aside half of the new money in your retirement plan account. Open a retirement account. And while it may be tempting to spend that salary bonus on a new extravagant thing for yourself or a vacation, don’t treat those extra funds as found money. Treat yourself to something small and use the rest of the money to help you save for your retirement goals. Historically, investments in the stock market have offered significantly better returns than savings accounts, making them the preferred thing for increasing your retirement savings.

Not all investment accounts are ideal for saving for retirement. To encourage people to save for retirement, the federal government has made some special types of investment accounts. These are known by the name retirement accounts. These provide certain tax benefits.

There are mainly two types of retirement accounts: 401(k), and individual retirement accounts (IRAs).

How much you should save?

The simple answer to this is as much as you can reasonably. Some people say that save at least 15% of your income. That's a good benchmark. But the true number would depend on how long you hope to work, and some other factors.

Understanding your investment account options

Now that you have decided to save money for retirement, make sure you invest the money wisely. The first important thing you need to know is that your account options will depend largely on where and how you work.

1. If you work at a For-Profit Employer

Available account: 401(k) plan.

If your for–profit employer offers any retirement savings plan, it is like a 401(k) plan. Many smaller employers do not offer any plan. You can generally sign up for this at any time. What you need to do is fill out a form. Here, automation is the key. Some employers will automatically increase your savings rate each year if you let them. And you actually should.

1. Things to know about a 401(k)

Matching: If you are really lucky, your employer would match some of your savings. It may match all that you save, up to 3% of your salary. Or it may put in 50 cents for every dollar you save, up to 6% of your salary. Whatever the thing is, do whatever you can do to get all that free money. It is like you will get an instant increase, one that will pay you more over time and the concept of compound interest applies here.

Taxes: As with most other employer-based plans, when you save in a 401(k), you don’t pay income taxes on the money you keep aside. Although, you will have to pay taxes when you withdraw the money in the future.

Use the 25* rule to calculate your retirement needs

If you have an idea of what your annual expenses might be in retirement, you can create a goal for yourself using the 25* rule. Estimate your annual expenses in retirement and then you need to multiply that figure by 25. The theory behind this thumb rule is the 4% safe withdrawal rate. The 4% thumb rule suggests that over a 30-year retirement, you can safely withdraw 4% of your portfolio in the first year of retirement, then keep withdrawing the same dollar amount, adjusted for inflation each year. This will help you to prevent running out of your savings early.

Determine your monthly savings rate

Image source: pinterest.com

Once you have determined your total retirement savings goal, see how much you would need to set aside each year to reach it using a retirement savings calculator. This is helpful. Estimate market returns at a conservative 6% per year, even if historically market rates have been higher.

Regularly increase your retirement savings rate

You may not be able to immediately save 15% of your income for retirement and that's okay. You can start small to take advantage of the crucial role that time plays in compounding the investment returns. Hence, you should regularly increase your retirement savings rate.

Determine retirement spending needs

You should have realistic expectations about post-retirement spending habits. It will help you define the required size of a retirement portfolio. Mostly, people believe that post-retirement, their annual spending will amount to only 70-80% of what they spent previously. This assumption is unrealistic actually. So you should have realistic expectations.

Conclusion

Image source: canarahsbclife.com

Image source: elearnmarkets.com

Saving for retirement is all about creating the future you wish for. It is all about setting some money aside that should be enough so that you can do what matters the most to you. The retirement goals should be set properly. They can be retiring early, living peacefully, or leaving a legacy. It touches upon both the aspects- saving and investing. All investments do carry a risk of loss, so keep this in mind. Retirement experts have offered various thumb rules. Keep things in perspective through good times and bad. Retirement planning actually leads to a peaceful and worry-free life. Retirement is the age where one just relaxes and reaps the benefits of all the hard work. 401(k) is simply better than IRA. You can even stop working before your full retirement age and receive reduced benefits. But it is better to retire at the age of 62 so that you get all the benefits. One of the better alternatives to pension is an Isa. Isa has the potential to take you all the way to retirement easily. Like pensions, Isas are tax-free saving things. But pensions are considered better than 401(k) plans as all the investment and management risk is on the employer. You get a guaranteed income, a set income for life.