How to Save Money for Retirement: 7 Effective Tips
The current life expectancy age in the US is approximately 78 years old. But with improved healthcare and easier lifestyles, the figure keeps rising year on year.
People are living longer and need to enjoy their golden years without financial stress.
This is why its more important now than ever to save enough money to cover your retirement years. Keep reading for 6 of the best tips on how to save money for retirement.
1. Determine Your Savings Goal
The first tip for how to save money for retirement is to establish your retirement savings goal. The easiest way to do this is to multiply your expected annual expenses when you retire by the number of years you expect to be retired. Having a set amount will give you the clarity you need to execute your plan thereafter.
2. Start Saving Money as Early as You Can
Another important tip you should follow when saving for retirement is to start as early as you can. Compound interest over many years will greatly increase the amount of money you have upon retirement.
Even if you can only afford to save $20 a month in your 20’s, over 50 years that amount could be thousands of dollars.
So if you haven’t started saving for retirement, start immediately, no matter what age you are.
As the saying goes, the best time to plant a tree was 20 years ago, but the next best time is now. Of course the closer you are to retirement and the further you are from your retirement savings goal the more aggressively you need to save.
3. Cut Your Expenses
To find the extra money you need to save for retirement you’ll need to reduce your expenses.
One of the best retirement tips is to save aggressively by reducing your spending on big-ticket items like housing, transportation, etc. Cutting these expenses will allow you to save a significant amount each month.
The more you save now, the earlier you can relax and retire.
4. Increase your Income
If you have cut down your expenses as much as you can and you are still not hitting your savings goals, you may need to find a second source of income.
The internet and smartphone technology have made it easier for us to have a side hustle or two. Set up an online shop and start selling fast-moving merchandise.
You can also sell high-income skills like writing or graphic design on freelancer websites. There are also apps like Uber and Airbnb that allow you to use your car or a spare room in your house to earn extra income each month. Check out many of the creative ways to earn extra money so find your niche and come up with an income generation strategy.
5. Open a Retirement Savings Account
An important part your financial plan is to save funds for retirement in an individual retirement account (IRA) or 401K account.
These retirement savings vehicles have tax breaks that allow you to earn and keep the maximum interest on your saved funds. So, one tip you must follow if you want to know how to save money for retirement is to open a retirement savings account.
You may be wondering whether to choose a traditional IRA, a ROTH IRA, or a 401K. A traditional IRA is a good retirement savings option if you want to reduce the amount of income tax you currently pay.
If you earn less than $66,000 a traditional IRA allows you to contribute up to $6,000 of your annual income if you are below 50 or $7000 for those over 50.
The funds in the account grow interest tax-free but you will pay taxes upon withdrawal. You also cannot withdraw the funds until you reach the age of 59.5 years.
If you withdraw funds any earlier, they would be subject to taxes and a 10% penalty.
Additionally, once you reach the age of 72 you must start making withdrawals on the account.
ROTH IRA’s are a better option if you want to avoid taxes on your compounded retirement savings. With these accounts, you can only save after-tax income. Yet all the interest earned on saved funds is tax-free.
Additionally, you don’t have to withdraw the funds by a certain age. If you want, you can save the money in the ROTH IRA account forever and pass the funds on to your next of kin as part of your estate.
If you expect income tax rates to be higher upon retirement than what they are at the time, it makes sense to pay the lower tax rates now.
6. Take Advantage of Employer Funds
The last type of retirement savings is the 401K which is offered by employers. One of the best tips for how to save money for retirement is to take full advantage of your employer’s retirement benefits scheme, especially if they offer to match part of your contributions.
Depending on who you work for and their contribution match offer, you may be able to get a lot of free money added to your retirement kitty.
Contribute the maximum amount you can to get the maximum matching contribution from your employer.
The more you contribute, the more you save on taxes. Letting such an opportunity go is leaving money on the table.
Another great thing about employer-sponsored 401K funds is that the money is automatically taken out of your paycheck. You won’t have to worry about forgetting to save or using the money on other priorities.
Learn How to Save Money for Retirement Today
Figuring out how to save money for retirement is something you want to get an early start on as soon as possible.
The older we get the harder it is to work for a living. So, it is better to cushion ourselves with enough savings to cover our living expenses.
Retirement advisors recommend that clients contribute the minimum required to get the maximum employer match to their 401k.
After this, they should then contribute the maximum they can to their IRA. If they still have spare funds, they should contribute the maximum they can to their 401k.
Finally, if you still have funds you can invest in other taxed retirement savings options like bank accounts or brokerage accounts. For more tips and information on how to retire well and other financial advice, read the rest of our blog.
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