For many Americans, we won’t start to think about our retirement savings until it is too late. Or we tend to get started later and we realize that by the time we retire, we may not have enough to last during our golden years.
There are many different reasons for this and can vary from person to person.
It could be a lack of financial literacy, not making enough money to worry about investing for retirement, or many are not even concerned about it because they have years to go before retirement age.
Yet, you should be thinking about your retirement savings and figuring out a way to start investing for your future once you start your career.
Have you thought about how much money you will need to retire? Do you have a plan on when you will retire or how you will reach your goals?
In this post, I’ll share some simple, yet effective retirement savings tips as well as understand what a retirement savings plan is so you can maximize your savings to ensure a more stress-free retirement!
What is a Retirement Savings Plan?
Having a retirement savings plan is essential to securing your financial security later in life. By utilizing various retirement savings accounts, you can maximize your tax savings, invest in the index funds, and take advantage of compound interest — leaving you with more money when the time comes to retire.
If you plan on retiring early, sometimes this money might be referenced as “FU Money.” This is money allowing you to quit your job when you want and not be reliant on a paycheck from a company.
So in order to boost your retirement savings, what type of retirement plans might you consider?
A 401k is the most common retirement account that allows you to contribute pre-tax income to invest and grow tax-free through the company you work for.
These accounts are often made available to select employees who elect to have a salary deferral to contribute to the retirement plan.
The contribution limits for 2020 are $19,500 annually. This means that you are capable of depositing $19,500 into your 401k plan throughout the year.
As an added benefit, many employers will choose to match some, or all, of your retirement contributions. This amount is typically capped at a percentage of your salary.
But this is absolutely something you should take advantage of if your employer offers a matching contribution — that’s extra money towards your retirement!
The second most common retirement account is an IRA (Individual Retirement Account). These accounts are another great way to save for retirement as the money you deposit will grow tax-free. In addition, these accounts are not tied to an employer, allowing you to save for your retirement in any situation.
There are a few options to consider when opening an IRA.
- Traditional IRA – Adding pre-tax money to a retirement account where investments are not taxed until you withdraw in retirement.
- Roth IRA – A Roth IRA allows you to contribute money that will grow tax-free when you withdraw in retirement. However, there are income limits for being eligible to contribute to a Roth.
- SEP IRA or Simple IRA – If you work for yourself or have a side business, you can still save and invest for retirement in one of these account types. There are different contribution rules for these as well.
In 2020, the contribution limit for an Roth or Traditional IRA is capped at $6,000 annually. But pay attention to the updates as the limits tend to increase from time to time.
Let’s say you are just getting started in your career or looking to invest, but do not have a lot of money currently — what should you do? Well, you can consider micro investing which allows you to invest with just a few dollars.
Here are some of my favorite investing apps to consider:
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How Much Should I Have Saved for Retirement?
The amount you should save for your retirement is different for every person. Because we all have different spending habits, the amount you’ll need varies.
There are many different retirement calculators available, but one of my favorite methods of determining how much you should save is by multiplying the amount of money you currently make by 70%.
For example, if you currently make $100,000 annually, you’ll want to have at least $70,000 of income each year to afford your lifestyle.
Another way to determine how much you need is by multiplying how much you need annually by 25. This will allow you to withdraw 4% each year to live off of.
In this example, if you need $75,000 annually to live off of, you would need $1,875,000 to reach your retirement goal. For most people, you’ll need at least 7 figures to reach retirement.
And remember, that is your cost of living currently as you need to think about where that might be in the future too pending your lifestyle.
If you want to get more in-depth, it’s wise to look at 3 factors:
- How much you plan to spend each year of retirement
- An estimate of how long you will be retired for (ballpark, since no one really knows how long we will live after retirement age)
- How your money will grow throughout retirement
By analyzing these three factors, you should have a better idea of how much money you’ll need to retire successfully while limiting financial stress along the way.
Tips to Maximize Your Retirement Savings
Saving for retirement can be tricky and take a significant amount of time. The good news is that you have until the age of 65 to grow your nest egg.
That is of course unless you are aiming to FIRE (financial independence, retire early), then you’ll need to elevate your investments and savings to reach your goals.
Either way, here are some tips you can use to boost your retirement savings!
1. Take Advantage of 401k Offerings
If your company offers any 401k benefits, this is a great way to save money for retirement. Whenever making contributions into a 401k, the money that you contribute is pre-tax dollars and also grows tax-free.
On top of that, if a company match is offered you can benefit from FREE, tax-free money. That’s as good as gold!
While some employer sponsored 401ks can not be the best and may have high fees, if they offer a company match it is still worth investing.
2. Utilize A Roth IRA
Roth IRAs are another great way to save for retirement because of tax advantages. While it doesn’t allow you to contribute pre-tax money into the account, it DOES let your money grow tax-free.
Many people will use both a 401k and Roth IRA simultaneously. Once their 401k is maxed out, they will contribute money into an IRA to boost their retirement nest egg.
However, remember that Roth IRAs have income limits if single or married filing jointly, which may limit your ability to invest in a Roth IRA.
3. Maximize Contributions
If you’re taking advantage of tax-advantaged accounts like a 401k or IRA, you should aim to maximize your contributions to these accounts. The IRS puts limits on your contributions each year. In 2020, you can contribute $19,500 into your 401k account and $6,000 into an IRA.
Not everyone can afford to max out their retirement savings, but contribute as much as you can. Overtime, you can increase your contributions as your salary increases.
For those nearing retirement, you are capable of contributing even more money into your retirement plans. If you’re over the age of 50, you’re allowed to contribute an additional $1,000 into your IRA and an additional $6,500 into your 401k account to catch up.
4. Fund Your Retirement Accounts with Side Hustles
Side hustles can be an excellent way to make money. Instead of using this cash to purchase a new car or upgrade your appliances, consider using it to fund your retirement accounts. If you haven’t maxed out your IRA contribution, this would be a great option.
Whether you are flipping furniture, using a 3D printer to make money, or completing freelance gigs, using side hustles to save money for retirement can be a great way to save money and jump start your retirement investments.
5. Ditch the Lavish Vacations
Do you take an annual vacation to the beach or your favorite destination? Consider taking a year break from your lavish vacation and use your savings to invest extra in your retirement plans.
While $2,000 a year might seem like an innocent amount considering all of your hard work, this can expedite your retirement savings goals and perhaps allow you to retire early!
And don’t get me wrong, I’m not against vacations by any means! It’s about maximizing your expenses and finding ways to save, yet still be able to relax.
The average vacation can cost about $1,145 on average, and then the average vacation cost for a family of four would be around $4,580 (source).
6. Limit Your Monthly Expenses
The amount you’ll need to save for retirement is determined by both your income and expenses. And it’s quite simple: by lowering your expenses, you’ll need to save less for your retirement.
One of the best methods of lowering your monthly expenses is by decreasing your housing costs. Because your home will often account for the largest portion of your budget, even a small adjustment could save you thousands per year.
You could consider moving into a smaller home or renting out a portion of your home to give your retirement savings a boost.
7. Invest Early
Younger people have a huge advantage when it comes to growing money. Time. The longer you have to grow your money, the longer you can take advantage of compounding interest.
Therefore, the earlier you start your retirement savings, the easier it will be.
For example, by starting your retirement savings in your 20s, you’ll have 30+ years for your money to grow. This will likely amount to hundreds of thousands of dollars earned in interest over the years when compared to someone just getting started at the age of 40.
Sure, even if you get a late start you can still end up with a nice nest egg by retirement. But, you’ll need to be more aggressive on investing and will have less time of compound interest working for you.
8. Make Saving a Priority
It’s easy to push off saving for your retirement because it’s likely more than a few years away. That can sometimes be hard to fathom or worry, especially if you got 25-30+ years. But time creeps up and onstead, you need to make saving a priority.
Here are a few tips to help you start saving:
- Make automatic deductions from your paycheck into retirement accounts
- Set up automatic transfers from bank accounts
- Have a monthly tracker of your retirement savings to keep an eye on your goals
- Use a tool and app like Personal Capital to ensure your investments and net worth are on track.
9. Slowly Increase Your Retirement Savings Rate
When starting your retirement savings it can be extremely overwhelming. Instead of trying to reach your savings goals all at once, consider a small increase to your savings over time.
For example, setting aside an additional 1% each year for retirement can be much easier to accomplish than an additional 5%. Try to increase your savings rate by 1% each year to get started.
10. Set Goals and Track Them
By setting goals, you can have something to strive for. Without them, you’re much less likely to stay disciplined to achieve your goals.
Try to set monthly goals that are both challenging but also attainable. One of the biggest mistakes people make when it comes to setting goals is making them too easy or far too difficult to accomplish.
You should have a mix of goals for the short-term, mid-term, and long-term — mixing in things that are easy and more difficult to achieve.
11. Ignore the News and Don’t Try to Time the Markets!
Saving for retirement is a long process. Do not get discouraged by short term volatility in markets. Because the economy works in cycles, it’s completely normal to have years which far outperform and far underperform others.
When these massive swings occur, some investors will try to “time the market” to maximize their gains. This strategy has been proven extremely difficult, if not impossible to accomplish.
Instead, try to use dollar-cost averaging to lower your average purchase price of a stock through these swings. This essential means you invest on a consistent basis, no matter what the price of the index fund, stock, bond, etc. is currently.
Saving for retirement is an essential piece of your financial journey. When the time comes, you want to enjoy your time away from the workforce while also living comfortably.
Whether you’re making $40,000 a year or over $100,000 a year, saving for retirement is essential. By utilizing retirement savings accounts you can limit taxes to maximize your savings.
If you’re not on track to reach your retirement goals, you can fund your savings with various side hustles or consider cutting your expenses.
Do you have any retirement tips? We’d love to hear them in the comments below!