According to a Northwestern Mutual study, more than half (56%) of Americans don’t know how much they’ll need to retire. What’s even more shocking is the median amount of retirement savings for U.S. citizens is $5,000. Depending on when you retire, you must expect yourself to live a few decades after. That means you’ll need to have enough saved throughout your working years for you to financially survive retirement. There isn’t enough emphasis on saving for retirement, so I want to share 6 tips to help you smartly save for retirement.
If you’re young, retirement may seem like a lifetime away. However, the younger you start saving, the less you actually need to save every month. That’s because earnings compound over time, which puts you further and further ahead. If you don’t believe me, read the article 7 Reasons to Start Saving for Retirement Early. Assuming that you already know the importance, let me share some words of wisdom to help you smartly save for retirement.
6 Tips to Help You Smartly Save for Retirement
#1 Don’t leave money behind
The worst thing you can do for your future is to leave money behind. What I mean is that you should be taking full advantage of any employer match or contribution. Often times, employers will match their employee’s retirement contributions up to a certain amount. At minimum, you need to be contributing to what your employer will match.
Failing to do so means you’re turning down free money – and for retirement, that’s silly! Do your research to know what your company offers and make sure you’re taking advantage. In addition to 401k matching, some companies offer additional retirement savings options, like annuity plans. Understand everything available to you, and take advantage of all options (whether now or in the future, when you can afford to take on more).
#2 Strongly consider a Roth option
When saving for retirement, you have the option to contribute pre-tax or post-tax dollars. When you contribute pre-tax dollars (traditional), you’re lowering your taxable income in the present. When you contribute post-tax dollars (Roth), you’re paying the taxes now so you don’t have to pay them in the future.
How do you know what’s best for you? Think about what your life will look like in retirement. Do you plan to still be making money through rental properties, investments, businesses? If so, you may be in a higher tax bracket when you retire, then where you are now. Wouldn’t it make sense to pay the taxes now (while you’re in a lower tax bracket)? It sure would!
If you know that when you retire you won’t be doing anything, then you’ll be in a lower tax bracket at that time, and you’ll want to pay taxes then. It can be hard to know exactly what’ll happen in the future, but you know yourself. If you won’t be able to sit still during retirement, you may as well pay your taxes now and go with the Roth option.
#3 Rollover any old retirement plans
Most people make a few industry and company changes throughout their professional careers. If you took advantage of retirement savings at old companies, you’ll want to roll over those funds into your current retirement plan. Once you leave a company, your retirement contributions stop. That means any money you had previously earned is not growing in value.
Instead of having that money sit there over time, not accumulating anything, you should roll it into a plan that you’re contributing to. Now, this money is helping you get further ahead because it has a chance to continue growing. It’s not the smoothest process to roll over old plans, but it’s the smartest move for your retirement savings.
#4 Think about what you’ll need at retirement and save accordingly
I touched on this in tip #2, but I want to spend more time here. Whether you expect a lavish retirement or not, you can still pinpoint the absolute basics you’ll need to survive. Will you still have a mortgage payment? That will increase what you need to have come retirement time. Will you have children to take care of?
Think about the bare minimum necessities you’ll need at retirement from an annual perspective. For example, when you retire, you’ll need a minimum income of $40,000 every year. Would that $40,000 (or about $3000/month) cover all of your expenses? What about medicine? When you think about what you’ll need, at minimum, from an annual perspective, you can use a retirement calculator to see how much you’ll need to start saving now, every month. I personally love the Merrill Lynch Retirement Calculator.
#5 Have someone review your investment selections
Here’s the thing. Saving for retirement doesn’t stop with what you’re contributing. You actually need to make sure you’re invested in the right funds to have what you need come retirement time. The only way to do this is to review your investment selections. Not everyone knows what they’re looking at, so you may want a professional to assist.
You can also read How to Research Your 401k Investment Options and pick the best funds for you. After reading about the appropriate investment mix for my age, I picked my own 401k investment options. That was about 5 years ago, and after the switch, my balance skyrocketed. You don’t want to skip this step, otherwise, you’re losing out on thousands in gains.
#6 Avoid pulling from your retirement savings early
The last piece of advice I want to leave you with for smartly saving for retirement is to not touch your retirement savings before you retire. I know it’s tempting, and I know that money could help you accomplish other things (like paying off debt or purchasing your first home), but it’s costing you your comfort during retirement.
If you absolutely need to pull from your retirement savings early, do so in the form of a loan. That way you’re paying yourself back over time. It’s still not an ideal situation, but at least you’re putting the money back where it came from. The downfall is that you lose out on gains that the money would’ve had before it was taken out.
Related: 5 Ways to Boost Your Retirement Savings
I hope this article inspires you to take retirement savings seriously. Your future is no joke and you don’t want to be forced to work through your retirement years because you failed to plan. Start assessing where you’re at with your retirement savings and make adjustments accordingly. Do you feel you’re on track with your retirement savings? Share your thoughts or questions in the comments section below.