Retirement is something we all must face. And therefore it is something we all must prepare for.
Retirement is the finish line to a career and on the other side is a permanent vacation. But in the meantime, we need to save up enough money, and that can be stressful and difficult.
Saving money for retirement requires careful and strategic planning. That’s where this article comes in. This list will show you practical ways you can start saving money for retirement. If you already have a nest egg started, these tips can help you save even more money.
Let’s jump in.
1. Start saving today
The earlier you start saving for retirement the better. If you’re older, don’t be discouraged. There are ways to save money even after your 50s. But whatever your age is, it’s important to start saving today. The main reason why is compound interest.
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You begin by contributing $2,000 in your first year. Without additional investment or work, you made $431.02 in four years. Essentially, your money worked for you and made even more money for you. The earlier you start this process the more money you will make.
2. Rebalance your budget
If you’re going to set aside money for retirement, you need to free up your budget first. Living well within your means allows you to allocate money to saving for retirement.
If you can’t afford to put money towards your retirement, it may be time to reconsider how you’re portioning your budget.
Begin by recording your income and monthly spending. This will give you a clear idea of how you’re spending your money and what areas need to be adjusted. Afterward, lower or cut unnecessary spending. Here are some suggestions to save money:
- If possible, go down to one vehicle
- Call insurance companies to lower your rates
- Call utility companies for suggestions to lower your bills
- End subscriptions to clubs, magazines, and streaming services
- Eat out less and cook at home
- Shop frugally at grocery stores
- Halt spending on luxury items
- Use free resources for entertainment, such as parks and libraries
3. Contribute the max to your 401(k)
The IRS institutes a limit on the amount you can contribute to an employee 401(k). In 2019, the IRS raised the limit to $19,000 per year for those under the age of 50. If you wait until the last second to start contributing, you can only give the maximum amount per year.
Ideally, the strategy is to save a portion of money annually for many years, rather than drum up a ton of cash in a few years before retirement. One of the greatest problems with 401(k)s is the lack of employee participation. Once it’s in your budget, increase the contribution to your 401(k) to the max.
4. Take advantage of employer’s match
Many employers offer to match a certain amount of your 401(k) contribution. This is free money. Always contribute enough to take full advantage of your employer’s match. Typically, they will offer to match up to a certain percentage of your income.
Let’s say they’ll match 50% of your contribution up to 5% of your salary and you make $40,000 a year. That means if you contribute $2,000 to your 401(k) your employer will give an additional $1,000. In this case, this is the maximum the employer will match.
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This is an easy way to save extra money for retirement. Speak to your HR department to learn about your company’s matching rates.
5. Start an IRA
IRA stands for an Individual Retirement Account. These are managed through a brokerage rather than your employer, but you can have an IRA in addition to a 401(k). Since 2019, the maximum amount you can give to an IRA is $6,000 per year if you’re under the age of 50.
There are two types of IRAs – traditional and Roth. Both have advantages and disadvantages, so you’ll have to decide which one is right for your circumstances. The major difference between them is how and when a tax break is applied.
Traditional IRA – The money you put in is not taxed until retirement. If you withdraw early, the money is taxed and penalized. Investors choose a traditional IRA when they believe their taxes will be lower at retirement.
Roth IRA – This is usually a better option in most situations. The money you put in is taxed right away, but there’s no taxation when you withdraw at retirement. Investors choose a Roth IRA when they foresee their taxes will be higher at retirement.
Let’s compare the two in a hypothetical scenario:
In this scenario, the traditional IRA escapes a 25% tax but pays 30% later. On the other hand, the Roth IRA is taxed at 25% but escapes a 30% tax later on. It’s possible that taxes will be lower in the future, but most investors and analysts believe they will be higher.
Always research your eligibility and speak with a financial advisor before choosing an IRA. Certain circumstances affect contributions, taxation, and withdrawing from IRAs. For example, high-income makers are not able to contribute to a Roth IRA.
6. Use catch-up contributions
Once you turn 50, the IRS allows you to make additional annual contributions to your 401(k) and IRA. As mentioned earlier, if you are below the age of 50 you can only contribute $19,000 a year to your 401(k). However, if you’re over the age of 50 you may contribute an additional $6,000.
There’s a similar story for IRAs. Normally you can only give $6,000 per year to IRAs. But if you’re over the age of 50, you can give an additional $1,000 per year. The IRS calls these “catch-up contributions.” Use this freedom to accelerate your retirement savings.
7. Delay social security
The earliest you can receive social security is 62 years old. Every year you delay taking social security (up to age 70) increases the amount you receive later. Depending on when you were born, you have a different “full retirement age.” You can discover yours at the Social Security Administration website.
Not only does delaying increase your social security benefits, but it gives you more time to accrue money for retirement. But this strategy isn’t appropriate for everyone. Consider your situation and whether delaying social security is right for you.
8. Work longer
One of the simplest and surest ways to make more money for retirement is to work longer. This may not be what you want, but consider working for more years than you intended. At the very least keep it an open option for two big reasons:
Life has unexpected expenses. Medical bills and emergencies can set your retirement back.
You may end up missing work. Many retirees express this, so consider retirement carefully.
Working longer increases your nest egg and delays beginning the withdrawal process. Meaning, not only will you save more money for retirement, but you won’t dip into the funds until later. Your nest egg will take you further into the future.
Additional tip: Don’t be quick to announce your retirement plans to your employer. If you tell your coworkers you plan to retire at 62, the word might get around to the higher-ups. Then, when it comes time to fill a higher position, they could pass you up because they know you plan to retire.
Imagine if you ended up working until 67 to save more money and delay social security. That means you could have had a higher paying job for five years.
Don’t announce your retirement until you’re sure it’s the right decision.
Saving for retirement gives you peace of mind
There are immediate financial needs in life, but there are also long-term financial needs. Saving for retirement gives you a better future with more money and the potential for earlier retirement. But saving for retirement also gives you a better present.
It gives you peace of mind.
The first step is realizing you need to start saving today. Then use these tips and tricks to find the best way for you to save for retirement. By following these tips you can avoid the regret of starting too late or saving too little.
Start securing a great retirement fund for yourself today.