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How to save money for retirement
Whether you’re just starting out or an experienced saver, new to the workforce or nearing retirement, here’s what you need to know
When it comes to saving for retirement, as with most other things, it’s a good idea to have a plan. (As you might have heard, a failure to plan is often a plan for failure.)
This is because knowing how to save money for retirement can help you get on a solid financial footing, so you can be comfortable in your later years.
This article will help you learn just how to do that. Read on to understand how to save money for retirement.
In this article:
How to build a comprehensive retirement plan
Building a comprehensive retirement strategy involves setting clear goals, saving early, maintaining a few best practices, and seeking support from trusted advisors. Doing so will help protect you from unexpected events and guide any adjustments you may need to make along the way to achieve your objectives.
Set clear retirement goals
When making the foundation for your retirement plan, it’s not enough to have a general idea of how much money you want in retirement. Instead, you should come up with detailed goals so you can be thoroughly prepared for the life you want to live in retirement. Here are some tips for setting clear goals:
- Review your financial situation, including your current savings, debt, and investments, so you can set realistic expectations.
- Get an idea of when you want to retire. Knowing your ideal retirement age will help you know how long you have to save.
- Envision any day-to-day expenses you’ll need to cover, such as food, rent, and transportation.
- Identify secondary needs and expenses, such as taking care of an aging partner or a disabled family member.
- Think about where you may want to live and account for any associated changes in cost of living.
- Consider how important travel will be for you as you age — for instance, you may want to visit family or take vacations.
- Account for any health-related costs and think about how they may change as you grow older.
- Rank your goals by priority to help you remain focused on what is most important.
Once you’ve come up with some clear goals, you can use an online retirement calculator to see how much you’ll need to save each month to reach them.
Begin saving for retirement early
It’s best to start saving money for retirement as early as possible. There are numerous reasons why saving early is important:
- It reduces financial stress by enabling you to spread out the cost of your retirement over a longer period.
- You create lifelong habits by starting early, making it easier to continue them later in life.
- You’ll have more compound interest so your retirement contributions are more worthwhile in the long term.
- Starting early can help you endure market fluctuations that might otherwise sideline your retirement plans.
- Contributing to a retirement savings account may come with tax advantages, such as tax-deferred or tax-free contributions.
- You will have more financial flexibility in the years preceding retirement if you already have a solid foundation.
- You can have more career options throughout your life if you are secure in your retirement savings early on.
- If you hope to retire early, that becomes more realistic and is easier to achieve with early retirement savings.
It’s best to start saving in your 20s. But even if you’re running late with your retirement plans, you can make catch-up contributions to make up for the years when you didn’t save enough. Catch-up contributions allow those aged 50 or older to add extra money to their 401(k) or IRA accounts.
Create and stick to a budget
A budget is the foundation on which you build financial security. It can help you stay on track with your month-to-month spending so you can keep up with your monthly savings plan.
Here are some steps to create a budget for your current situation:
- Start by tracking your monthly spending and income. List all the regular payments you’re making, including toward debts. For categories that vary, such as what you spend on entertainment, come up with an average monthly number.
- Identify where you are willing to spend less and what you can’t afford to cut. This will allow you to balance out your income and expenses.
- Determine how much you can allocate toward your retirement savings each month. If it doesn’t match up with what the retirement calculator showed you needed to reach your retirement goals, go back to step 2 and see if there are any other cuts you can make. Otherwise, you may need to adjust your retirement goals, such as increasing your age of retirement.
- Set aside your determined monthly retirement savings amount to your savings account.
There are a number of options you have for where to place your retirement funds, but the most common options are a 401(k) or an individual retirement account (IRA).
A 401(k) is an employer-sponsored plan and typically has higher contribution limits but fewer investment options than IRAs.
If you have access to a 401(k) plan, you should find out if you are eligible for employer-matching contributions. With these types of contributions, the employer matches your retirement fund contributions up to a specified limit.
However, note that employers aren’t required to offer match retirement savings contributions, or if they do, employees may need to stay at a company for multiple years before they can access this benefit.
Regarding IRAs: A traditional IRA allows you to make tax-deductible contributions, but you’ll have to pay taxes when you withdraw funds after retirement. A Roth IRA doesn’t get you any tax breaks up front, but you won’t have to pay taxes when you withdraw your funds later in life. The IRA contribution limit is often lower than that of a 401(k).
Depending on your savings plan and goals, you can choose between an IRA and a 401(k), or you can have both.
Reduce debt and maintain good credit
Managing your debt helps to ensure you have good credit. Good credit helps to keep your debt manageable. With low debt and good credit, you can set aside more money for your retirement.
However, sometimes it’s not that simple. For instance, you may have a low-interest loan that allows you to prioritize your retirement savings first.
In general, if you are going to take on debt, choose wisely. A home is usually a good investment and a mortgage will build your credit score. But avoid high-interest debt such as credit card debt if you can.
If you have high-interest debt, try to pay more than the minimum amount each month to get it out of the way as soon as you can. Consider options such as consolidating debt via a personal loan to lower your interest, and talk with a financial professional before choosing how much to put toward retirement.
Whether paying off debt or saving more for golden years is wiser will ultimately depend on interest rates. If the return you can expect from investing is less than what you will get charged in interest on the debt for that same amount, you may be better off paying down your debt first.
Establish an emergency fund
Life is full of surprises, and unexpected expenses can negatively impact your retirement savings. As part of your budgeting, and in addition to your retirement savings, you will want to have an emergency fund set aside. This money can provide a buffer against expenses such as car repairs and health emergencies so you can keep your retirement plans on track.
You can and should place emergency funds into an interest-bearing account, but avoid anything challenging to access, such as stocks, bonds, or certificates of deposit (CDs). You need to have access to your emergency fund easily at a moment’s notice without incurring fees or penalties.
Diversify your investment portfolio
With either a 401(k) or an IRA, you have a number of investment options available to you, including target date funds whose makeup evolves as you near retirement. While you don’t have to buy stocks with the funds you have in either of these types of accounts, you’re likely missing out on the opportunity to grow your savings by not investing. No matter what you choose to invest in, it’s usually a good idea to diversify your portfolio.
Basing your entire retirement on a single investment can be highly risky. If something goes wrong with one investment, you can end up without any funds to support your living in the post-work years. Diversifying your investments, however, spreads your risk across multiple areas.
A solid investment mix can include stocks, bonds, and mutual funds. You may even decide to put some money into a CD or high-yield savings account for even less risk.
The best investment strategy for you will always depend on your unique financial situation. Talk to a financial professional if you are uncertain about where to allocate your savings funds. You may have a broker or financial planner, but even your bank should be able to provide advice on how and when to diversify investments.
Delay claiming Social Security benefits
Currently, you can start accessing your Social Security retirement benefits at the age of 62, and the full retirement age is 67. It’s generally recommended that you wait until 67, if you can, to receive your full monthly benefit amount.
However, if you are able to wait until collecting your benefits, you can increase your monthly benefit payouts even further. Although this isn’t an option for many, delaying when you start your benefits can increase your monthly benefits by a certain percentage for each year you delay up to the age of 70. Currently, the maximum annual increase is 8%.
Regardless of whether you are able to or decide to delay your benefits, the Social Security Administration still recommends signing up for Medicare before you turn 65. After that age, you may experience additional costs and delays when applying for Medicare coverage.
Regularly review and adjust your retirement plan
No matter how well you set up your retirement plan, there are bound to be unexpected events, from changes in your financial situation to new tax laws and market fluctuations. Beyond keeping an eye on how your investments perform, check on the progress you’re making on your retirement plan and investments at least once a year to ensure everything is still on track.
Whether it is your banker, broker, or accountant, check in with whoever you work with regarding your retirement savings. Have them update you on changes to laws or regulations that could affect your retirement plans. Discuss your current plan with them and ask for recommendations that will keep your goals attainable.
Seek help from a professional financial advisor
Lastly, it can be a good idea to work with a financial planner to map out your retirement plan, especially if you find your finances complex and challenging to navigate. Financial advisors can help you build a realistic and effective strategy, diversify your investments, and take advantage of tax breaks.
Beyond expertise, a solid financial planner will provide a second set of eyes to look over your decisions. They will also be able to help you maximize your contribution limits and optimize your investment returns.
How long will my retirement savings last?
Even if you’ve made and followed a plan for your retirement savings, it’s hard to calculate precisely how long they will last. What you can do is use expert-recommended calculators and formulas to make a rough estimate of how much your funds will last you after retirement.
Here are some key things to consider when thinking about how long your savings might last:
- How much you currently have in savings, and how much you’ll be deducting in monthly expenses
- How much inflation is expected to increase your monthly cost of living
- Whether you’ll have any additional monthly retirement income, including Social Security and pensions
- Whether you have any assets to support your retirement income, such as other savings accounts and investments
- If you’ll have any tax liabilities related to your income sources in retirement
The right amount of spending and saving upon retirement will depend on your individual needs and circumstances, but the goal is to ensure that you have enough for the rest of your life while being able to enjoy yourself and be comfortable. A ballpark withdrawal amount that experts recommend is around 4% each year.
Consider term life insurance
While planning for your golden years, there are a number of key considerations to make about yourself, your family, and your circumstances. While you’ll inevitably have to adapt along the way, having a retirement plan now is a great way of preparing a comfortable life for yourself and your loved ones after you decide to retire.
Term life insurance from Haven Life can also give you and your family peace of mind when it comes to dealing with those unexpected events. With the right policy, you can help ensure that those who matter most to you are taken care of. Start by getting a free online quote today.
About Benjamin KibbeyRead more by Benjamin Kibbey
Our editorial policy
Haven Life is a customer-centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.
Our editorial policy
Haven Life is a customer centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.
Our content is created for educational purposes only. Haven Life does not endorse the companies, products, services or strategies discussed here, but we hope they can make your life a little less hard if they are a fit for your situation.
Haven Life is not authorized to give tax, legal or investment advice. This material is not intended to provide, and should not be relied on for tax, legal, or investment advice. Individuals are encouraged to seed advice from their own tax or legal counsel.
Haven Term is a Term Life Insurance Policy (DTC and ICC17DTC in certain states, including NC) issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001 and offered exclusively through Haven Life Insurance Agency, LLC. In NY, Haven Term is DTC-NY 1017. In CA, Haven Term is DTC-CA 042017. Haven Term Simplified is a Simplified Issue Term Life Insurance Policy (ICC19PCM-SI 0819 in certain states, including NC) issued by the C.M. Life Insurance Company, Enfield, CT 06082. Policy and rider form numbers and features may vary by state and may not be available in all states. Our Agency license number in California is OK71922 and in Arkansas 100139527.
MassMutual is rated by A.M. Best Company as A++ (Superior; Top category of 15). The rating is as of Aril 1, 2020 and is subject to change. MassMutual has received different ratings from other rating agencies.
Haven Life Plus (Plus) is the marketing name for the Plus rider, which is included as part of the Haven Term policy and offers access to additional services and benefits at no cost or at a discount. The rider is not available in every state and is subject to change at any time. Neither Haven Life nor MassMutual are responsible for the provision of the benefits and services made accessible under the Plus Rider, which are provided by third party vendors (partners). For more information about Haven Life Plus, please visit: https://havenlife.com/plus
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