Investing for retirement is the best decision a person can make. Not only do you have to account for how you want to live your retired life, but you also have to consider becoming disabled and paying more for health care. Saving for retirement does not have to be life changing, but it WILL change your life for the better. Here are some tips on saving for the future.
1. Decide on a Retirement Lifestyle. Do you want to live in a planned retirement center with amenities? Do you want to be a jetsetter and travel all over the world? Do you want cable? All of these things need to be considered
2. Set a Retirement Date. You will then know how much you need to put away to hit that retirement date. The earlier you have in mind, the more you need to save now.
3. Develop a Retirement Plan. If you want to sustain your current lifestyle, multiply your monthly budget by 12 to get a yearly estimate. Estimate how long you plan to live. Multiply the number of years from retirement to when you plan to die (morbid I know) and this is a rough estimate of what you will need to save up.
For example, if you want to retire at age 65, and want to live off of $6,000 per month and you know that people in your family live to be at least 90, then you need to save up for 25 years of life. Multiply $6,000 by 12 to get the yearly cost of living, which is $72,000. Multiply that by 25 years and you will see that you need $1.8 million by the time you are 65 to retire with the lifestyle you desire.
4. You CAN have Millions by Retirement! A person in their 20’s that saves $3,000 a year for 5 years and no more, that invests that money will have over $1.4 million dollars by the time they are 65, given a 10% rate of return on their investment. A person in their 30’s who does the same for 5 years and no more will earn about $800,000 with a 10% rate of return. This is just an example of the power of time and money.
5. Open an Individual Retirement Account. Both a Roth IRA and a traditional IRA allow you to invest $5,000 per year. A Roth IRA is funded with already taxed money and when you cash it in it is tax free. A traditional IRA is tax sheltered money, and will be taxed when you cash it in. The average American will benefit most from a Roth IRA.
6. Fully Fund a Matching 401K. If the company you work for offers a 401K plan, take it! Some companies match contributions which not only decrease your tax liability, but0 will also lower your income. Lowering your income on paper can put you into a lower tax bracket and which means you pay less tax. It is a fantastic option!
7. Don’t Let an IRA Sit. Make your retirement money work for you by investing in mutual funds, stocks, bonds, and other securities. This is where the magic happens. Time and money work together to build wealth unlike a sitting pot of money that will actually be worth less when you retire because of inflation.
8. Invest Based on Age. A younger person should have their money in more aggressive securities like growth mutual funds and individual stocks because they have more time to recover if the market takes a hit. An older person that is nearing retirement keep their money in market accounts and bonds that provide more security.
9. Don’t Touch Retirement Funds. You will be penalized for prematurely cashing in your money. You are allowed to take some of it out, so long as you pay it back immediately. However, if you need to touch your retirement funds chances are you won’t be able to pay it back quickly.
10. Update Retirement Plans as Necessary. If you find that you need to take money out of your retirement account, it might be time to change your investment strategy. It is best to cut back a bit if you find you are over contributing and your current lifestyle is hurting. Taking time to save up and pay off debt is part of having a sound financial plan and it is best to invest when your fundamentals of saving, budgeting, and managing debt are in tact.
Always remember to choose and investment strategy that is right for you. You should never be losing sleep at night because of your portfolio. Consult with a financial planner for more information and to develop the best plan for your needs.