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Many financial gurus advise people to start saving for retirement as soon as they can. The simple idea is that the earlier you start, the more money you’ll have to retire with.
But often times our realities dictate differently, we’re so busy taking care of our month to month needs and retirement is so far off that it’s not a concern right now. No matter your current situation, it’s still a great idea to start saving for your retirement now.
Let me give you a financial example as encouragement, you want to retire at age 65 with an annual income of $50,000 to live on:
- You wait until you’re 40 to start saving, you put aside 25% of your income – At 65 you’ll have $727,208, but if you want to live on $50,000 a year, this money will run out when you turn 81.
- You start saving at 30, you put aside 15% of your income – at 65 you’ll have $961,941, this will run out at age 87 if you use $50,000 a year.
- You start saving at 25, you put aside 10% of your income – at 65 you’ll have $928,201 that ends at 86 if you stayed on $50,000 a year.
Note: I did not include any Social Security retirement income you may earn as well. Let’s say you’re 40 now, your estimated Social Security would be roughly $1,586 a month. Combining the two incomes together is about $5,753 a month.
Now, let’s look at where you can save for retirement:
1. Your Budget
Once you have your budget and can see all your expenses, you can go through each category and find where you can eliminate or cut back. Then take the newly found extra money and put it towards your retirement fund.
You may feel that you’re already struggling as is and think there is nothing to cut back on. In reality, you’re only cutting out things that are a tiny fraction of your expenses. The little things that we just quietly pay without thinking about it is the problem.
The average household family can find about $2,700 a year, or $225 a month, to cut back on.
2. Your Employer
The next best place to save for retirement is through your employer. Especially if your employer offers a contribution matching program.
Many companies offer some sort of matching contribution for an average of 2.7% of a person’s pay, but the most common is 50 cents on the dollar. For every $1 you contribute to your company’s 401(k), your company will contribute 50 cents.
Let’s do a little math with the numbers I used earlier, remember you earn $50,000 a year:
- At 40 you put 25% of your income into the company’s 401(k), your company matches half of that (12.5%) – at 65 you’ll have $1,090,813 saved which will run out at age 90.
- At 30 you put in 15%, the company puts in 7.5% – at 65 you’ll have $1,442,911 saved which will run out at age 100.
- At 25 you put in 10%, the company puts in 5% – at 65 you’ve saved up $1,392,302 and that will last until you’re 99.
As you can see, it makes a big difference in your retirement account.
3. Your Bank
Then you need to start putting your money into a retirement account through your bank. With either a tax advantaged account, or a regular investment account.
The differences between the two investment accounts are:
A tax advantaged retirement account, or a personal IRA (Individual Retirement Account), allows you to invest with tax-free growth or on a tax-deferred basis.
This means that the money invested is tax deductible every year and when you retire and start withdrawing, you pay taxes on those withdrawals. Also, the IRS sets a maximum amount you can invest each year.
There are three types of IRA accounts – the traditional IRA, the Roth IRA, and the SEP IRA. If you’re interested, here’s a book to check out.
A standard investment account also allows you to postpone the tax liability of income earned on some financial assets, like stocks, investment funds, and investment deposits.
There is no limit on how much you can put into your investment account and usually no restrictions on when you can access this money (unless you bought some limited securities). Want to know the best way to invest your money – here’s another good read.
Be sure to check around at different banks and see which ones offer better interest or options that are best for you.
4. Your Apps
Take advantage of your smartphone and download some investing apps that will do the retirement investing for you.
There are several investment apps that offer retirement investing, these include:
- Acorns: “Acorns Later” offers to select the IRA that’s right for you
- Blooom: A 401(k) Manager
- WealthSimple: Offers a “Rollover wizard” to transfer any 401(k)s or accounts to them
- M1 Finance: This investing app offers retirement investing as well.
Keep in mind though, these apps should be used as an extra tool and not be your sole method of investing.
5. Your Side Hustle
Make money in your spare time, then invest the money into your retirement account.
There are so many side hustles you can choose from and many can fit your interests, your capabilities, and your schedule. Some you can do solely on your smartphone or computer, some you can do with your hobby, some you can do with your car and many more.
The idea is to earn as much as you can while you can and invest that money into your retirement fund so you don’t end up having to work during your retirement to make ends meet.
6. Delay Social Security
As you approach retirement age, make a decision to delay the start of your social security payments.
For every year you put off receiving a Social Security check before you reach age 70, you increase the amount you receive in the future. Age 62 is the earliest you can retire, but for each year you wait your monthly benefit will increase, and the amount adds up quickly.
This might be easier to do in some work industries than others, but with people living much longer these days, today’s life expectancy for women is 81 years, and for men it’s 76 years. Compare this to the 50s where the life expectancy for women was 71, and for men it was 65 years.
Remember I mentioned the potential social security amount would be $1,586 a month? Let’s say instead of retiring at 65, you decide to retire at 70, your new monthly amount would be $2,290 a month. That’s a $704 monthly increase by waiting 5 years.
One last good reason for delaying your social security payments is having a larger amount in your survivor benefits for your spouse.
These ideas are all great places to start saving for your retirement – but – you should already have plans in progress to also pay off your debts, have an emergency fund, and have a college fund. The order of importance of any extra money should be:
- Emergency Fund
- College Fund (if you have children)
- Retirement Fund
These money goals can be enacted simultaneously, but the amounts doled out to each one is derived from its ranking.
My final tip is to not depend on one method of investing and in only into one account. Akin to “putting all your eggs into one basket”, you should diversify in case of any unexpected incidents.
Saving for retirement at any age should not be a hard endeavor and with set goals and strong commitment it can be done.
Here are some more FFL articles about retirement: