If you want to secure your future after retirement, it is crucial to start saving early. Saving for your retirement is essential, and it should come before vacations and even your dependents’ education funds. Whether you would like to start a business, travel the world, or have a relaxed life after retirement, this financial cushion will support everything. Despite all the planning and budgeting, the most important step is starting.
The earlier you start saving funds for your retirement, the more you’ll have to meet your goals. However, even if you get a late start, you can still boost your savings before reaching retirement age. Here are some helpful tips to get started!
1. Make a Plan
Coming up with a retirement plan requires you to think of your goals and the amount of time you have to meet them. Simple is best, and there are various retirement accounts that are ideal. Some of these accounts are:
- 401(k) – With this plan, you can contribute a part of your pre-taxed salary to tax-deferred investments, reducing the amount of taxes you pay annually. These investment plans have restrictions on when and how you can withdraw money.
- Traditional IRAs – After depositing money into these accounts, you can invest in ETFs, stocks, mutual funds, and bonds. Restrictions are based on your income. When you withdraw money, you pay income tax on your income and gains.
- Roth IRAs – These are funded with after-tax dollars that are not tax-deductible. Any gains generated within this account are not taxed, and you can withdraw money before retirement without being penalized.
- Roth 401(k) – Contributions are made from your after-tax salary, and earnings are not taxed. It is an employer-sponsored account and does have contribution limits
- SEP IRA – If you are self-employed, you can contribute to this individual retirement account and deduct it from your taxable earnings. Employers can also contribute to a SEP IRA and receive a deduction on that amount.
2. Budget for Retirement
Many things may change after retirement, but some expenses and bills remain the same. A budget helps you eliminate the fear and worry that you might run out of money. With a retirement budget, you can set goals of how much you need to save, how to spend it, and where to make adjustments if you find any gaps that need to be filled. Usually, 15% is recommended, but it may not be feasible. Start small, try for 5% to start, and save bonuses or gifts.
How much you need will depend on your lifestyle goals and what age you plan to retire. The number of years between your current age and expected retirement age determines how much you need to contribute from your income. The lower the number, the higher the amount, and vice versa. Your plans for after retirement are also crucial factors to determine how much you should save. If you want to start a business, travel, or build a house, your investment may need to be higher.
3. Change Strategies if Needed
You can be more aggressive in your early years, but you might want to switch to lower risk strategies like CDs as you get closer to retirement. It may be necessary to protect the funds you have accumulated by shifting from stocks to bonds gradually. Also, you can automatically adjust autopilot investments by selecting target-date retirement funds on your retirement plan.
If saving is difficult, consider working longer, even if only part-time. Having additional years of work is beneficial for various reasons, including:
- With an additional or extra source of income, you can make more contributions to your retirement funds.
- It delays the withdrawal of contributed funds, giving them more time to grow.
- The longer you wait to buy an annuity, the cheaper it becomes.
- Waiting longer to claim increases your Social Security benefits.
4. Avoid Risk
Risk should match your age and asset allocation recommendations. However, until you learn the proper skills to manage your risks, it is advisable to avoid them. After retirement, needs and emergencies may arise at any moment, and it is best to have some fully available funds. Before moving to riskier investments, save reserve assets. If you decide to take risks, diversify your investments, accumulate more funds, and calculate your liability.
5. Pay Down Debt
Paying off debts is highly advisable before you start saving for retirement, especially if you’re still young. Credit cards and loans have high-interest rates and no tax benefits and can eat away your savings. If you’re older, you can make investments to generate more funds that will help you pay off your debts. However, it is crucial to pay down debts as soon as you can to start saving early.
Prepare for Retirement Now
Saving for retirement is a crucial part of your life, and the earlier you start, the better. Make a plan, develop a budget, change strategies if need be, avoid risks, and pay down debt to have a fun and secure life after retirement. As with most financial planning, it is always wise to seek out the opinion of a qualified professional. A CPA or financial advisor can help you make the most of every dollar you invest in retirement.
If you have additional suggestions on saving for your retirement plan, please share them in the comments below.