When it comes to retirement, the earlier you plan and save, the better. Because of
compound interest and tax deferrals, you can benefit more the earlier you start
saving for retirement.
Do you know how much you need to save for retirement? How can you maximize
your savings?
These strategies will help:
1. Think about the kind of retirement you want. Will you want to live differently
when you retire? Start visualizing the type of lifestyle you want to live when
you retire so you can tailor your savings goals to that lifestyle!
How old do you want to be when you retire?
Will you still work part time?
Where will you live? Do you want to live domestically or internationally?
Will you be renting a house, or will you own your house?
What will your monthly costs be?
2. Start saving today. Most (if not all) articles you read about retirement will
encourage you to start saving today. The reason being is over time you can earn
money from your savings via compound interest.
Compound interest is the interest you earn on interest. It comes from
reinvesting the interest you earn. It works in your favor.
Hypothetical examples suggest that even a 25-year-old who invests $75
per month would accumulate more assets by 65-years-old compared to a
35-year-old who invests $100 per month.
Put as much as you can away now so that you can reap the rewards later.
Some financial experts recommend saving 15% of your pre-tax income
towards tax-advantage accounts.
3. Set a goal. Take time to carefully consider retirement expenses while factoring
in inflation. Will you have other expenses that you might not have right now
(such as children’s expenses)?
How much do you want to have when you retire?
Will you be travelling when you retire?
4. Automate your savings to a retirement plan. Take advantage of tax deferrals
to a retirement account. Set up automatic payments to your Individual
Retirement Account (IRA) or 401(k). This way, the money gets deposited into
your retirement savings plan before you have to think about it.
401(k)s have a high contribution limit ($19,500 if under age 50), and
sometimes employers are willing to match your contributions. Check with
your employer to see if they match what you put in.
If you are under 50, you can contribute up to $6,000 to an IRA. If you are
50 or older, you can contribute up to $7,000 to an IRA.
Money contributed to a Traditional IRA may be deductible on your taxes
that year. Then, when you withdraw money from that account in
retirement, you pay taxes then.
Money contributed to Roth IRAs are not deductible on your taxes that
year. However, withdrawals you make from that account when in
retirement are not taxed.
5. Diversify your savings. Don’t put all your eggs in one basket! Your IRA is just
one piece of the puzzle. Consider investing in other assets, such as property,
mutual funds, or bonds.
6. Take advantage of employer matching. If your employer matches your IRA
investments, take advantage of that! Deposit the maximum amount that your
employer matches.
7. Continually reduce your debt. Pay off your credit cards every month or pay as
much as possible towards your credit card debt. When possible, accelerate your
mortgage payments. As a rule of thumb, reduce your existing debt and avoid
accumulating new debt.
Saving for your ideal lifestyle when
Saving for your ideal lifestyle when you retire is a marathon, not a sprint. When you
build your wealth over time, you don’t have to worry about tackling everything all at
once.
Remember that over time, your retirement account will build! Try to save at least
10-15% of your pretax income to start. You’re already ahead of the game by thinking
about this now!
