In 2019, a GOBankingRates survey reported that 64% of Americans are not prepared for retirement. Planning for retirement can begin at any time, and the earlier you start, the more secure you’ll be. But how much should you save? And how? Read what financial planners and experts say you should do to retire rich.
Aim To Contribute 20% Of Your Income To Savings
Savings are the key to a comfortable retirement. But how much do you need to save? Wealth manager David Bach recommends saving between 10% to 20% percent of your pretax income. Put these savings into an account that you are keeping for retirement.
If you cannot afford to do that yet, work towards a place where you can afford to. Even if you can only put 5% toward retirement, it’s better to have a little saved up than none at all.
Make Your Savings Automatic
Do not rely on yourself to put money into savings. We’re all human, and we tend to forget simple tasks like that. Fortunately, most banks have an automatic payment system that will transfer a certain amount of money into savings every week, two weeks, or month.
When you set up automatic payments, your retirement fund will build without you ever knowing it. “The 10 percent is taken out of your paycheck and automatically invested for you before you ever see it,” Bach wrote in his book The Automatic Millionaire.
Calculate The Minimum Of What You Will Need
To save up for retirement, you have to know how much to save. As a general rule, retirement is how much you spend yearly times 25. So if you spend $40,000 every year, your retirement fund will have to be $1 million at least.
There are also retirement calculators online that will estimate how much you need based on when you retire and where you live. All you need is an estimated minimum; try to save more than that.
Estimate What You Will Have By A Certain Age
If you continued to work at your current job until retirement, how much would you save? There are ways to estimate that. If you put a certain amount in savings every month, multiply that to determine how much you will earn by retirement.
You can also find online tests, such as NerdWallet, that will show you how much you need to save to get $2 million by the time you’re 67. These estimates will tell you whether you need to tweak your budget.
Learn About Social Security Benefits
In 2020, only one-sixth of Americans eligible for Social Security benefits collected them. Most people do not know about retirement benefits that can give them more money. For example, most people can start receiving retirement benefits at age 62, even if they are still working.
Research social security benefits and when you can start collecting them. To get these benefits, you need to pay Social Security taxes, so make sure that you are up-to-date on those.
Opt Into Your 401(k)
During a 2008 survey, 95% of Americans agreed that their 401(k) plan better prepared them for retirement. A 401(k) contributes a percentage of your pay to funds that are not taxed. It’s an easy way to save up for retirement.
But don’t settle for the minimum, says Pamela Hess, the director of research at the consulting firm Hewitt Associates. Most employees can increase the amount of their income that enters the 401(k) and save up much more.
Start Saving As Soon As Possible
According to Morning Consult, 39% of Americans start saving for retirement in their 20s, and 25% in their 30s. But is it too early to start in your 20s? No! Katie Taylor, the vice president of thought leadership at Fidelity Investments, recommends saving as soon as you can.
“If you spend the first half of your career not saving, you’ve got to do a lot of catching up later in your career,” she told CNBC. Plus, you won’t have a cushion of savings if the market crashes.
To Start Early, Pay Off Student Loans Quickly
The best way to save for retirement early is to pay off student loans early (if possible). Financial planner Stuart Ritter recommends focusing on private student loans.
Do not pay off federal student loans as quickly as possible. Why? Because their interest rate is fixed and will not increase. If you have an interest rate that increases, try to pay it off as quickly as possible. Then, you’ll be able to contribute more to your retirement fund.
Take A Purposeful Mini-Retirement
“Mini-retirement” is a term coined by Tim Ferris in his book, The 4-Hour Workweek. It is a longer-than-average vacation that provides people some respite from work. According to Business Insider, most mini-retirements span one to six months, and many involve travel.
However, you can plan a purposeful mini-retirement. Take off a few months to live in your desired area as if you are retired. This will let you know whether your plan and budget for retirement will be feasible in the future.
Settle In A Place That You Can Afford
It’s no secret that some areas are more affordable to retire in than others. If you cannot or do not want to retire in your area, research other areas. According to U.S. News, you should consider the cost of living, tax environment, climate, and quality of life.
While searching for retirement areas, do a “trial run.” Visit the area and stay there overnight if possible. Does it feel lively? Do you like the people there and the restaurants?
When Will You Retire?
In 2017, Boston University’s Center for Retirement Research found that 20% of households incorrectly estimate when they will retire. To determine when you will, first, visit the Social Security retirement age calculator. It will suggest when most people from your generation can retire.
Some people continue to work beyond retirement age. But to save up, you’ll need to know the minimum age when you can retire. This will let you know how much to save by which year.
If You’re Late, Here’s How To Catch Up
If you are older and need more money for retirement, don’t fret! The IRA offers catch-up contributions for this scenario. It allows you to contribute a bit more (from $1,000 to $7,000 annually) to your workplace’s retirement program.
The catch-up program also allows people to make investments–such as selling a home or car–and invest that money into a secure retirement plan. If this sounds like you, talk to your employer about how you can utilize this program.
Be Able To Pay For At Least Two Expenses
Retirement involves numerous expenses: housing, utilities, food, healthcare, travel, etc. Instead of planning for all of these expenses (which will quickly become overwhelming), focus on a few of them.
“Make sure your plan includes a way to make sure you have enough for guaranteed sources of income to pay for at least those two expenses,” says Robert Powell, the creator of Retirement Daily. On average, the two most expensive payments are housing (33% of income) and health care (25% of income).
Compare Yourself To The Average Retirer
By comparing yourself to the average person’s retirement journey, you’ll learn whether or not you need to change your plan. According to the National Retirement Risk Index, 50% of people who reach retirement age in 2021 will not have enough to retire.
Check the U.S. Census Bureau’s Current Population Survey. It lists Americans’ incomes by age, both by mean (average) and median (exact middle). Compare that to what you will need to retire in your desired area.
Have Your Employer Match 401(k)
Many companies offer a policy where the employer will match your 401(k). This means that the employer will put the same amount of money in your 401(k) that you will. If your business offers this, take advantage of it.
That said, employers always have a matching limit. Reach it if you can. Your 401(k) will directly contribute to retirement, and even if you leave the job, the money will still be yours. That’s why it exists in the first place.
Why Many People Work Longer
People can retire at age 62, or they can continue working and retire at 70. It might benefit you to do the latter. Not only will you earn more cash, but you might actually live longer!
In 2016, a study found that people who work at least one year more beyond their retirement tend to live longer. Not everyone can work longer; some have to stop because of medical issues or simply prefer to retire. But if you can work longer, you might have a better retirement.
Enrolling In A Roth IRA Will Help Down The Line
During retirement, adults still need to pay taxes. But the Roth IRA program allows them to opt-out of this. While in a Roth, you pay more taxes now, but you will be tax-free when you retire or reach age 59 1/2.
Many employers offer Roth 401k’s for both younger and older employees. They have the same maximum as regular 401k’s. If you can afford it, talk to your employer about whether they offer a Roth.
If You Can, Roll Over Your 401k
In 2005, a study by Hewitt Associates found that half of Americans consolidate their 401k money when they switch jobs. But you don’t have to do that. Some positions allow a rollover IRA, which transfers one employer’s 401k to another.
When you take out your 401k savings, you might lose a lot from taxes. If you cannot transfer your 401k, you can leave it with your old employer. As you build up savings, this could save more in the long run.
Need Help? Talk To A Financial Advisor
If all of this retirement talk sounds overwhelming, contact a financial advisor. They can simplify the terminology and help you budget. Ask the planner if they are a True Fiduciary, which means that they are legally required to act within the best interest of the client.
According to Forbes, you should ask the planner some questions about their plan. These include: What are the risks in retirement? Do you provide comprehensive planning? How long have you been working as a financial advisor?
Take A Little Risk: Invest In Stocks
If you want to take a risk, invest in stocks. Buying stocks makes you a partial owner of that business, and you will receive some profit that the company gets. If you make smart choices and get lucky, you will earn some extra retirement money.
The amount of risk you take depends on your age. If you’re younger, you can take a higher risk; but if you are closer to retirement, limit your risk. Do not invest your life’s savings!