How to Save Money For Retirement
With today’s busy lifestyles, planning for retirement is one of those things that usually don’t get as much of your attention as they deserve. Young professionals in their early stages of their careers are so bogged down by the pressure of work and their future spending plans that savings and retirement are the last things on their minds.
The biggest myth which keeps young professionals from saving for retirement is that they can’t spare extra cash at a time when their entry-level paychecks are so small and expenses are so great. They always struggle to get around this important question: “How can I save money for retirement when I can hardly pay my bills?”
The answer to this question is simple: “pay yourself” first, before you spend on anything else. What does this mean? This is actually a very basic strategy: by sparing a portion of your income before you deplete your salary on monthly bills and expenses, you take the first step in building a nest egg for your retirement. And the easiest way to start saving for your retirement is to set up a regular, automatic contribution from your salary account. Set it up once and your savings keep growing over time.
And the earlier you start saving, the better it is for your retirement planning. Suppose you start saving when you received your first paycheck. The logic behind this strategy is that no matter how meager your savings put aside for retirement are, they will have more time to grow. In other words, your investment portfolio will grow as you reinvest your returns back into your retirement account. This is called “compounding.”
Here is an example explaining what difference it makes if you start to save early. Suppose you start building your retirement savings at the age of 25, and you’re able to save $4,000 a year in a tax-free retirement saving account for 10 years. If you plan to retire by the age of 65, your $40,000 in retirement savings will have grown to more than $649,878 in the next 35 years, assuming you’re receiving a seven-percent return on your savings and don’t contribute anything to your saving account after 10 years.
Start Planning For Your Retirement Goals Early
Retirement means different things to different people. One of the most important considerations in planning for your retirement and building your savings is clearly identifying your retirement goals.
For example, what kind of life are you envisioning for yourself and your family during your retirement age? For some people, it means a lot of traveling, spending more time with the family, or living in a cottage. If this sounds like things you would do, then you have to start saving while keeping these objectives in your mind. It’s important to continue to build on your foundation, re-evaluate your needs and ensure that you are on track to reaching your goals.
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When saving for your retirement, you should know what you can control, how much you can save, and what investment options you have to achieve your retirement goal. Most experts say you will need roughly 80% of your current annual income to live comfortably. This could include sources such as Social Security, but it’s probably wise to conclude that your personal savings will provide your primary source of income.
Saving for retirement shouldn’t be complicated if you have defined your goals. The key is to determine how much you’ll need and then develop a plan to achieve your goal.
Understand Money and Investing
Planning and beginning to save for your retirement are just two parts of a successful retirement strategy. Another part is determining which investment vehicle is good for you and how it can get you to your retirement goal.
You’re only successful in building a good retirement portfolio when you understand which products are best suited to you. Some people leave their retirement portfolios on autopilot and don’t understand the most basic concepts of investing.
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According to a study by Fidelity Investments, successful young savers are more likely to manage their investments themselves when saving for retirement. More than half the “super savers” built their own portfolio from the ground up with mutual funds and exchange-traded funds chosen specifically for their investment strategy, compared with nearly a third of the “non-super savers.” (Source: “Saving secrets from young super savers,” Fidelity Investments, May 11, 2016.)
You should definitely consider tax-favored retirement accounts such as individual retirement accounts (IRAs) and 401(k)s. These accounts are the best avenues to save for your retirement and allow you to defer taxes on the money you save and the returns you earn within the account.
In the end, saving for retirement is all about planning and outlining your goals during the early days of your professional life. After years of hard work and sacrifices, retirement can be the most beautiful part of your life if your financial needs are taken care of.