How to Save for Retirement One Year at a Time
When you are trying to save for retirement, the earlier you start saving, the better due to compound interest. Even if you haven’t begun saving yet, there are still steps you can take to increase your savings. It’s not too late to get started. Learning how to save money can make a big difference in your retirement savings.
How Much Money Do You Need To Retire?
When answering the question of how much you need to save for retirement, you need to know what kind of retirement you are looking for. Are you looking to move to a condo or are you hoping to drive a Lamborghini? After you know your retirement vision, you can apply certain rules of thumb. For example, see what 4% to 5% of your retirement savings are and then what your lifestyle would be living off of that. If that number is not where you want it to be then you will have to increase contributions or live frugally during your retirement.
There are certain benchmarks you should hit as you age:
- At age 30, you should aim to have your annual salary saved.
- By the time you are 40, the goal is to have three times your annual salary.
- At age 50, aim for six times your salary.
- One rule of thumb is to have 12 times your salary before you retire.
Save For Retirement In Your 20s
If you are in your 20s, your ultimate goal should be to start saving and by the end of your 20s, aim to have as much in your retirement accounts as your annual salary.
Start Saving
If you have an employer 401k plan then start saving. If you were auto-enrolled then increase your contribution or set up an automatic escalation so you can put some more in each year. If you don’t have an employer-sponsored 401k then start saving with a Roth IRA.
Building up Your Emergency Fund
Start small with your emergency fund. It’s recommended that you should have six months of your expenses put away in a high-yield saving account.
This can be a hard task for someone who is just beginning in their career. Don’t worry since you don’t have to put it all in there at once. Aim for one month’s worth and then build from there. When you have a fully funded emergency fund, it stops you from going into your retirement accounts if you need cash. You want to avoid doing this since it will lower your ability to get compound interest.
Think about Stocks
When you are young, you can play it more aggressively and put a higher percentage of your portfolio in stocks. When you are younger, you are able to handle the ups and downs of the market. Think about creating a balanced portfolio of investments that fits your timeline and risk tolerance. You may not want to pick individual stocks so also look at mutual funds and exchange-traded funds in order to better diversify your portfolio.
Save For Retirement In Your 30s
When you are 35, you should aim to have two times your salary saved in your retirement accounts and be on your way to three times by the end of your 30s.
Continue with Your Emergency Fund
When you are 30, it’s time to start growing up financially. This means you could have more to lose. For example, a late mortgage payment is much different than just missing rent. Now is the time to start increasing your emergency fund and have closer to six months saved up.
Full Speed Ahead with Retirement Savings
This is a time in your career when you start earning real money and it’s more important to save for retirement. If you have fallen behind on your goal in your 20s, now is the time to make it up. You want to take advantage of some automatic increases in your savings. You are able to set up direct deposit into your fund and increase the percentage each year. Since the increased percentage will go in automatically you won’t have a chance to miss it.
Be on the Same Page as Your Spouse
Many people are getting married in their 30s so you should be on the same page. Successfully reaching retirement goals depends on clear communication with your spouse on financial decisions, including the monthly budget and planning for the future.
Save For Retirement In Your 40s
By the time you end your 40s, you should have about six times your salary saved.
Pay Off Debt
Many families at this stage in life have credit card debt. Getting rid of this will make it easier to put more money toward retirement. There are different things you can do to get rid of debt, including signing up for no-fee balance transfer credit cards or debt consolidation. Once you have paid off your debt and you are used to being without that money, raise retirement contributions.
Don’t Be Too Conservative
At age 40, you are still years away from retirement so you don’t need to rush and play it too safe. During this time, you can scale back stocks to 80% of the portfolio and then balance the rest in conservative holdings, such as bonds. You still want to maintain a broad view of the holdings. It isn’t enough to just focus on your 401k. You also need to take all your investments into consideration. Make sure you didn’t forget about other benefits, such as a 401k you earned at a previous job. If you have an old 401k then roll that into an IRA and invest more.
Put Any Potential College Savings in Perspective
You may have been saving for your kid’s college education since they were born. If you have then you should be able to keep at it without moving huge amounts of cash from your retirement savings. If you haven’t saved for college then you may not have enough money to be able to fund both. Many parents want to sacrifice their own retirement planning for their kids. If you want to help your child and money is going to be tight, look for some compromise that may not have as big of an impact on your retirement savings, such as sending children to in-state schools instead of private colleges.
Save For Retirement In Your 50s
By age 60, you are getting ready to retire and you should have eight times your savings put away.
Use Catch-Up Contributions
When you turn 50, there are some advantages since you can contribute more to your retirement tax-free. Start taking advantage of these opportunities. It’s not hopeless. This isn’t quite the time to go to cash yet and you may still want to consider 50-50 in bonds and stocks since you will still want some growth in your portfolio.
Figure out Your Budget for Retirement
You may already have an idea of your retirement budget but now is the time to start to nail it down. Think about your expenses, potential medical bills, and the support you will have from Social Security or a pension plan. You may not want to downsize and it’s not uncommon to spend more in retirement.
Plan for Medical Costs
Help protect your finances against unexpected medical costs. Just one medical bill can sometimes eat up your savings. You may even need to consider the cost of extended care at nursing homes. A retirement plan should have some consideration of future medical costs. An option is long-term health insurance, which can pay for expensive medical care options, including assisted living.
Step Up Your Financial Game
Be Smart with Your Money
Saving Once You Have Hit Retirement Age
Once you have reached your retirement age, now is the time will you have to dip into your savings but there are still ways to make the most of everything you have saved thus far.
Use Social Security to Your Advantage
Your Social Security can be a big factor in your retirement fund. Based on your birth year, your eligibility for full benefits can vary but it helps to look into the best option for you. If you aren’t sure when the best time is to claim your Social Security benefits, consult a financial planner.
Additional Savings
When you are ready to use the money you have saved for retirement, figure out the best time to access the funds. Tax-deferred accounts are more efficient when your income tax rate is lower. Implementing strategies to reduce your taxes can help you manage income better throughout the retirement years.
How Can I Save Money to Boost Retirement Savings?
If you’re wondering “How can I save money?”, there are plenty of tips you can do to save for retirement and boost your savings, no matter what stage of life you are currently in.
Automate Savings
You may have already heard the phrase "pay yourself first" and when you are looking to save for retirement, this is true. If you automate your contributions every month then you have the opportunity to grow your nest egg without thinking about it.
Control Spending
Examine your budget and see where you can save. You may be able to negotiate a lower rate on your car insurance or home insurance and then add that to your retirement savings. You can save money in other ways, such as bringing lunch to work so you can keep adding if your budget is already tight. Every little bit you save for retirement can make a big difference. You may also want to cut down on your cost of living.
Meet Your Employer’s Match
If your employer is going to match your 401k plan then you should contribute at least enough in order to take advantage of the match. It’s essentially free money so you don’t want to leave it on the table.
Open an IRA
You may want to consider opening an IRA to help build the nest egg. There are two options for you and both have their pros and cons.
Take Advantage of Catch-Up Contributions if You Are Over 50:
One reason it’s important to start early is that contributions to plans can be limited. When you reach the age of 50, you are eligible to go beyond normal limitations with catch-up contributions. If you haven’t been able to save as much as you like over the years, now is your chance.
Focus on Getting Started
Now is the time to begin so you should start saving and investing as much as possible and let compound interest work. The more you can invest when you are younger, the better off you will be. By putting just $75 per month aside when you are 25, you will accumulate much more than if you had started to invest $100 a month at 35.
Contribute to Your 401k
If your employer offers this and you are eligible then it can be a big advantage. You can invest more of your income without feeling that it’s impacting your monthly budget as much.
Set a Goal
Knowing how much you need will make the process of investing and saving easier and more rewarding. Set some benchmarks along the way and then gain satisfaction as you knock out your retirement goals. You can use a retirement calculator to determine how much you should save based on when you want to retire.
Stash Extra Funds
If you have extra money, don’t spend it and instead increase your contributions. Dedicate at least half of the new money you get to your retirement plan. It can be tempting to take a bonus or a tax refund and splurge on something but use those extra funds instead to get closer to your retirement goal.
Consider Delaying Social Security
For every year you are able to delay receiving your Social Security benefits, you can increase the amount you get in the future. Age 62 is the earliest you can get Social Security but for each year after, until age 70, you can get more and that income will add up quickly. Pushing retirement back just even one year can make a big difference.
What You Should Know about 401k Plans
There are a lot of benefits to having an employer-sponsored retirement plan. It makes saving easy since the money is taken out of your paycheck. You could get paid to save since many employers match a portion of the contribution. It’s also one of the largest tax havens and you will save more than with an IRA. Investment gains are tax-deferred and as long as you keep the money in the plan, you will owe nothing as it continues to grow.
However, there are some downsides to the plan. Your investment choices are limited. The plan administrator chooses investments but the selection is usually small. Sometimes fees can erode the returns. There are investment expenses but there can also be administrative fees.
Regardless of the plan, the money you put in your plan lowers the taxable income for the year and can help you save for retirement. If you decide to leave your job, you may want to roll over the money into an IRA in order to get better control.
Traditional IRA vs. Roth IRA
There are different types of IRAs but the most common ones are traditional and Roth. There are some differences in how the taxes work.
Traditional IRA: With this type of IRA, the money you contribute can be deductible from your taxes and you fund the account with pre-tax dollars. You will pay income taxes on the money you then withdraw during retirement.
Roth IRA: With this IRA, the contributions aren’t deductible and the account is then funded with post-tax dollars. You don’t get any upfront tax breaks and the payoff will come later in retirement when you aren’t taxed.
While there are some other differences, the main thing is that you need to ask about your taxes. When you retire and you are ready to draw money, do you anticipate that the tax rate will be higher? Most people aren’t sure of this answer and that’s okay so, for this reason, many people like to choose a Roth IRA. Those who qualify for a Roth are going to benefit from the tax rules down the road. This way, you pay taxes now and then pull out tax-free money. If you are unsure, you can contribute to both types of IRA as long as you don’t exceed the annual limit. There are also some employers that have a Roth 401k and the same line of thinking applies.
Both types of IRA have restrictions in certain circumstances, which means that you may not be able to choose between the two. If you earn too much, it’s possible that you won’t be able to contribute to a Roth IRA.
Final Thoughts
You should start to save for retirement as soon as possible. Even if you haven’t begun yet, there are plenty of things you can do to increase your retirement savings. It helps to break down retirement savings by your 20s, 30s, 40s, and 50s so you can stay on track during every decade of your life.