Save for Retirement

If you're just out of school and entering the workforce for the first time, retirement is probably the last thing you're thinking about—but that's exactly when you should start saving! Getting into the habit of saving early makes it relatively easy to ensure you've got enough squirreled away to retire comfortably.[1] But if you waited to save and now you're scrambling, that's okay too. We've pulled together some tips that will help you build up your retirement savings regardless of your age, from simple things you can do immediately to larger investment strategies that will take a little more planning.

Steps

Create a monthly savings goal.

  1. Set your goal based on when you want to retire. A basic rule of thumb is to put 15% of your annual income towards investments for retirement. If you can afford to save more, go for it! That'll give you more flexibility on your retirement date and what you can do after you retire.[2]
    • For example, suppose you put aside $50 a month for your retirement. Assuming an annual return of 6%, after 20 years, you'd have $23,218. That's not really enough to retire on, but it's a good start.
    • If you're trying to figure out how much money you want to have when you retire to live comfortably, experts recommend that you retire with about 80% of the annual income you have right now.

Find ways to cut back on spending.

  1. Reducing your expenses allows you to save more for retirement. You don't necessarily have to turn into a penny-pincher—you should still enjoy life! But at the same time, you can look for unnecessary expenses that you could cut out and put that money toward retirement instead.[3]
    • For example, if you subscribe to several video or music streaming services, you might pare it down to just one. You can also look at ways to get streaming for free—some mobile phone companies include a streaming service subscription in their phone plan.[4]
    • Remember that a single dollar you're able to save today and put towards retirement could be worth several dollars by the time you retire. Smart spending provides the foundation for your retirement savings.[5]

Avoid high-interest debt.

  1. Carrying balances on credit cards will cost you money and hurt your credit. If you've racked up a lot of credit card debt, spend the next few months focusing on paying that off—then you can get back to saving for retirement. Carry through your smart spending strategies by not throwing away money on high interest.[6]
    • Sometimes it's impossible to avoid taking out a loan for something. But as much as you can, try to save up for big-ticket items that you want or need, rather than putting them on a credit card.
    • Having a solid credit score also saves you money in the long run because, when you do need to borrow, you'll be eligible for better financing terms and lower interest rates.
    • Talk to a credit counselor if you need help managing your credit card debt. They'll evaluate your budget and help you create a plan to get out of debt.

Open a retirement plan at work.

  1. Contribute enough to max out your employer's contribution.[7] The beauty of employer-based retirement plans is that your employer typically matches your contribution, up to a specific dollar amount. Your employer's contribution is essentially free money, so contribute at least enough to take full advantage of it.[8]
    • The average match is up to half of 6% of your total annual income. That means if you contribute 6% of your total annual income each year, your employer will match half your contributions—so you're actually socking away 9% of your total annual income. Not too shabby!
    • Keep in mind that your employer match is part of your overall compensation package. If you don't use it, you lose it, just like unused paid time off that disappears at the end of the year.

Start your own retirement account.

  1. If your employer doesn't offer a retirement plan, open one for yourself. In the US, an IRA (Individual Retirement Account) isn't dependent on where you work. There are 2 different kinds with different tax treatments: the Roth IRA uses after-tax dollars, while contributions to a Traditional IRA are tax-free (but taxed once you start taking distributions from the fund).[9]
    • Even if you have a plan through work, it's a good idea to also open an individual account.[10]
    • If your employer offers a retirement plan but doesn't match your contributions, you might be better off with an individual plan than with your employer's plan.
    • Leave the money in your retirement account alone until after you retire. There's a 10% tax penalty on early withdrawals.

Put any extra money you get toward retirement.

  1. Bonuses, tax refunds, or any "extra" money can grow your retirement fund. If you have a budget based on your regular income, you're free to invest any extra money that you hadn't already calculated into your budget. For many people, this can result in several thousand additional dollars going into your retirement fund each year.[11]
    • When it comes to investing this money, you have 2 basic options: you can either invest all of it immediately, or you can deposit smaller monthly increments to invest it over time. Either method increases your savings for retirement—just pick the one you're most comfortable with and stick with it.

Invest at least 50% of any raise you receive.

  1. Increase your retirement contributions every time you get a raise. If you've been following a budget, you're used to living on the money you made. When you get a raise, increase the amount you're contributing to your retirement fund—since you didn't have the money before, you won't miss it.[12]
    • For example, suppose you get a raise that amounts to about $1,000 in extra income each month. Increase your retirement fund contribution by at least $500 a month. That way, you're still getting a raise, but you're also growing your savings for retirement.

Set up automatic transfers to your retirement accounts.

  1. Make your savings automatic so you don't have to think about it. If you have a retirement plan through your employer, your contributions will automatically be taken out of your paycheck. But with an individual account, you'll have to do this on your own. Typically, you can set up automatic contributions through your bank's website or mobile app.[13]
    • Once you've got your automatic withdrawals set up, don't mess with them! It can be tempting to pause them for a month if money's tight, but it's better to cut back on some expenses and keep your savings as it is.

Buy a home instead of renting.

  1. Pay off your mortgage before retirement so you can use the equity. After you retire, it would be ideal not to have a mortgage or rent payment to worry about. If you buy a house when you're young and pay the mortgage off early, you can eliminate that expense for yourself when you retire. You also have the option of selling the house, buying a retirement condo, and pocketing the difference.[14]
    • The beauty of a condo after retirement is that you don't have to worry about exterior maintenance—the jobs that are particularly difficult for older homeowners.
    • Retirement communities typically sell units below market value and also offer perks such as swimming pools, golf courses, workout rooms, and spas. If you have your mortgage paid off before you retire, selling your home and moving into one of these communities will really lower your monthly living expenses.

Roll over employer-based plans.

  1. Re-invest the balance in another retirement account if you switch jobs. In the US and many other countries, you'll pay hefty penalties if you withdraw from your retirement account early—even if you're planning on investing the money elsewhere. Instead, arrange to have the balance transferred to another retirement account that you control.[15]
    • If the fees on your plan are low and you like the investment options, on the other hand, you can always just leave it there. If your new employer also offers a retirement plan, you're free to open a new plan and keep the old one right where it is.

Talk to an investment professional.

  1. A financial advisor can help you meet your goals. While you don't necessarily need to hire a professional to get started, they can help get you on the right track. If you don't feel that your goals are being met through your current investment strategy, have someone look at your investments and advise you on what you need to do to have the retirement that you want.[16]
    • In the US, look for a registered investment advisor—these professionals are legally required to act in your best financial interest. This is especially important if they're managing your investments on your behalf.
    • Professional advice is especially important once your nest egg starts growing. They'll help you make sure every dollar you save continues to grow and advance you toward your goals.[17]

Build a portfolio for active trading.

  1. Diversify your portfolio by investing in different assets and sectors.[18] Retirement accounts are essentially like mutual funds. The investments are chosen by the fund's managers with an eye to achieving a particular growth rate. If you want to invest on your own, open a trading account with an online broker and choose a mix of assets and stock in different sectors to maximize your profits.[19]
    • All investments carry some amount of inherent risk. Stocks are considered the riskiest, but they can also get you the highest returns. Bonds have a much lower risk associated with them, although your returns will be more conservative.[20]
    • To diversify among sectors, choose sectors that aren't closely related. For example, energy and healthcare are 2 major sectors that aren't closely related, so one falling wouldn't trigger the other to fall as well.

Tailor your investment strategy to your age.

  1. Make riskier investments when you're young. Generally, experts advise making riskier investments on "growth stocks" (those low-cost shares that are poised to grow exponentially) early on. As you start to near retirement, though, invest more conservatively, with a mind to holding onto the wealth that you have. Ultimately, your strategy depends on how long you have to save for retirement and how much money you want to have. Here are some ideas to get you started:[21]
    • If you're in your 20s: Invest in a mix of stocks and real estate (through exchange-traded funds, or ETFs) with a small portion (5-10%) of your portfolio in growth stocks. Rebalance your portfolio once or twice a year.
    • If you're in your 30s: Start moving some money from growth stock to lower-risk investments. Rebalance your portfolio once a year.
    • If you're in your 40s: Put your money in index funds rather than individual stocks to reduce risk. Start buying bonds, which are a more conservative asset. Continue to rebalance your portfolio once a year.
    • If you're in your 50s: Scale back on stocks and put more of your investments into bonds with guaranteed income. Hold onto blue-chip stocks that issue dividends. Continue to rebalance your portfolio once a year.


Tips

  • Start saving for retirement as soon as possible, even if you can only make small contributions. It all adds up, and you'll thank yourself when you're older![22]
  • As you build your savings, protect it with an umbrella insurance policy. If you get sued, this policy will pay out and keep a loss or settlement from wiping out your retirement fund.[23]

Warnings

  • Never dip into your retirement savings. Build up a separate emergency fund so you don't have to worry about burning through your retirement funds if something happens.[24]
  • All investments carry some amount of risk. Make sure you understand what you're investing in and how your investments work. There are plenty of free resources online that you can use to educate yourself on investments—take advantage of them!

Related Articles

References

  1. ↑ https://www.savingmatters.dol.gov/employees.htm
  2. ↑ https://www.npr.org/2020/10/02/919494281/retirement-wont-save-for-itself-here-s-how-to-save-what-you-need
  3. ↑ https://www.bls.gov/careeroutlook/2013/fall/art02.pdf
  4. ↑ [v161482_b01]. 21 July 2020.
  5. ↑ [v161596_b01]. 15 October 2020.
  6. ↑ https://www.bls.gov/careeroutlook/2013/fall/art02.pdf
  7. ↑ https://www.moneyunder30.com/beginners-guide-to-saving-for-retirement
  8. ↑ [v161596_b01]. 15 October 2020.
  9. ↑ https://www.moneyunder30.com/beginners-guide-to-saving-for-retirement
  10. ↑ [v161482_b01]. 21 July 2020.
  11. ↑ https://www.kiplinger.com/investing/602260/lump-sum-or-not-whats-the-best-way-to-invest-your-year-end-bonus
  12. ↑ https://www.moneyunder30.com/beginners-guide-to-saving-for-retirement
  13. ↑ https://www.moneyunder30.com/beginners-guide-to-saving-for-retirement
  14. ↑ https://www.aarp.org/work/retirement-planning/info-2014/rent-or-buy-house-in-retirement.html
  15. ↑ https://www.bls.gov/careeroutlook/2013/fall/art02.pdf
  16. ↑ https://www.bls.gov/careeroutlook/2013/fall/art02.pdf
  17. ↑ [v161596_b01]. 15 October 2020.
  18. ↑ [v161596_b01]. 15 October 2020.
  19. ↑ https://www.investor.gov/additional-resources/general-resources/publications-research/info-sheets/beginners-guide-asset
  20. ↑ [v161482_b01]. 21 July 2020.
  21. ↑ https://www.moneycrashers.com/asset-allocation-diversification-investments-change-time/
  22. ↑ https://www.savingmatters.dol.gov/employees.htm
  23. ↑ https://www.iii.org/article/what-umbrella-liability
  24. ↑ https://www.savingmatters.dol.gov/employees.htm



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