You don’t have to be near the full retirement age of 67 to start saving for retirement. It would be great if you started putting away money for your nest egg in your 20s. If you did, you would reap the benefits of compounded interest when you hit your sunset years.
Truthfully, few people in their 20s are visionaries. When we’re young, we live in the present. The future is still far away.
Until one day we wake up and realize the future is here.
How Much of Their Income Are Americans Saving for Retirement?
According to a 2023 study by the Federal Reserve, 28% of non-retired Americans don’t have retirement savings. 54% of non-retired Americans had money tied to a contribution such as 401(k) or 403(b).
The interesting statistic was that of the non-retired Americans who had some type of retirement savings plan, only 31% thought their savings were on track.
In comparison, in 2021, 40% of non-retired Americans believed their savings for retirement were on track.
The drop in confidence is backed by a 2023 study by Bankrate that showed 56% of Americans believed they were behind in retirement savings.
How to Save for Retirement
How To Save For Retirement – Forbes Advisor
If we got you thinking, don’t worry.
There’s no better time to save than NOW.
Follow our nine tips on how to save for retirement and you’ll have something to look forward to other than watching the grass grow.
1. Set a Retirement Savings Goal
A 2023 study by the Center of Retirement Research at Boston College showed that to retire by age 65, you should start saving when you’re 25.
If you missed the bus, there will always be another one.
You can still set aside money for your retirement even if you’re in your 30’s, 40’s, or 50’s.
The first step is identifying your goals.
What will you need the retirement savings for?
The usual needs are as follows:
- Medical and Health Plan
The older you get, the higher the probability of getting sick. The probability is exponentially higher if you have pre-existing conditions or have a history of illness over the last decade.
- College Education
Do you have kids who are about to go to college or presently enrolled in college?
According to a 2023 survey by Statista, 40% of college tuition expenses are paid for by parents.
If you’re planning to pay for your kids’ college education, you have to factor their tuition into your retirement savings plan.
- Cost of Living Expenses
Without a steady source of income, you’ll have to rely on savings to pay for your cost of living expenses.
What are the monthly recurring expenses? Which ones can you cut off? Which expenses can be significantly reduced?
- Vacations and Special Rewards
Of course, what’s retirement if you can’t enjoy it?
Now, you have the time to explore the world. Have you dreamed about seeing the countryside on a Harley or navigating the world on a sailboat?
With your career in the rear-view mirror, you have a fun time in front of you.
However, fun and “retirement toys” cost money. Although you deserve the rewards, it must not be at the expense of your other important needs.
2. Open a Retirement Account
Retirement accounts are placements created by the government to encourage people to save money by offering attractive returns and tax advantages.
There are two types of retirement accounts: Employer-sponsored retirement accounts and Individual Retirement Accounts (IRAs).
As the term implies, employer-sponsored retirement accounts are benefits offered by employers to their employees. Examples of these types of retirement accounts are 401(k), 403(b), and 457(b) plans.
With an employer-sponsored retirement account, a portion of your salary is automatically deposited to your savings account monthly. You can contribute as much as $23,000 annually to your savings.
If you don’t have an employer-sponsored retirement account, open a Traditional IRA or a Roth IRA.
- Traditional IRA: The Traditional IRA allows you to fund investments with your pre-tax dollars. The government taxes your money whenever you withdraw from your account but at your current tax rate.
Another benefit of the Traditional IRA is that your contributions can reduce your taxable income while building your savings account.
Let’s assume you earn $75,000 annually. If you decide to contribute $10,000 to a traditional IRA, your taxable income will drop to $65,000.
- Roth IRA: Unlike the Traditional IRA which is funded by pre-tax dollars, the Roth IRA is funded by post-tax dollars.
As long as you’re 59 years and six months old, and you’ve had the Roth IRA for at least five years, you can withdraw from the account, and the proceeds are tax-free.
With a Roth IRA, you can mix and match investments that suit your style. You can choose to invest in stocks, bonds, mutual funds, or Exchange-traded Funds (ETFs).
If this is your first time investing in an IRA, be on the safe side and hire an investment brokerage company.
3. Open a High-Yield Savings Account
Savings accounts have gotten a bad rap because the interest rate is low; oftentimes lower than the inflation rate. If inflation is high, the money in your savings account loses its purchasing power.
However, some banks offer high-yield savings accounts with higher Annual Percentage Yield (APY) than regular savings accounts.
Presently, the U.S. inflation rate is at 3%. Depositing a portion of your income in a high-yielding savings account with an APY of 5% or higher will help you cope with inflation.
As you build up your savings, you can look at investments that offer a better return.
Here are a few examples:
- Long-term Certificates of Deposits: Issued by banks and offer higher interest rates than savings accounts.
- Long-term Corporate Bond Funds: Companies that need to raise money offer bonds to investors. Corporate Bond Funds offer a higher rate than Government Bonds.
- REIT Index Funds: Real Estate Investment Trust (REIT) allows you to invest in different sub-sectors of real estate such as offices, apartments, and lodging.
Talk to your bank manager or portfolio manager and get their recommendations on the best placements for your money.
Being conservative is a safe way to invest – but you might deny yourself good opportunities to earn more money if you don’t take some risks.
Remember, investing isn’t gambling. Your earnings don’t depend on the roll of the dice. With the help of a trusted financial advisor and research, you come up with trading plans that identify entry and exit points to mitigate risk.
4. Gradually Increase Your Allocation for Savings
Here’s a question that we’re sure you’re wondering why we haven’t answered in this article:
“How much money should I save?”
There are no clear-cut rules on how much money you should save monthly. Generally, once you’ve paid off your monthly bills and set aside money to fund the next 15 days, the rest of your income can be deposited in your savings account.
One of the commonly recommended savings guidelines is the 50/30/20 Rule:
- 50% of your income pays your monthly bills or “Needs.”
- 30% of your income pays for non-essentials or “Wants.” For example, your gym membership, dining out, new clothes, and mobile phone accessories.
- 20% of your income goes to Savings.
As you can see, you can allocate more income to savings by dining out less and by not buying new clothes every month. With a bit of discipline and restraint, you might save 30% to 35% of your income.
5. Streamline Your Monthly Budget
Did you know that 42% of consumers subscribed to services they don’t use anymore?
Subscriptions are monthly recurring expenses. At the end of the current billing period, your subscription is automatically renewed. The fees are deducted from your preferred payment method, usually a credit card or PayPal.
Among the popular monthly subscriptions are:
- Streaming services: Netflix, Hulu, and Amazon Prime
- Cable TV: DISH and DIRECTV
- Software: Avast, McAfee, Grammarly, and Copyscape.
- Food Delivery: GrubHub, DoorDash, and UberEats.
- Online Banks: Chime, CashApp, and Sofi
Consumers spend an estimated $133 on subscription services – some of which they no longer use.
You can generate more savings by canceling or unsubscribing to services you no longer need or use.
6. Slowly Clear Out Your Debts
Every dollar that goes to your creditors means fewer dollars for your retirement.
If you’re mired in debt, your dream must be to wipe it out as soon as possible, right? Sadly, it’s not as easy as that.
Managing debt is a slippery slope. If you try to settle your debt immediately, you will compromise your ability to save for your retirement.
Likewise, clearing out debt at warp speed might affect your payment history which accounts for 35% of your credit score.
The major credit bureaus – Experian, TransUnion, and Equifax – prefer consistent payment periods over drastic changes.
Also, if the credit card accounts for a large portion of the debt, and you cancel the oldest one after you clear out your account, your length of credit history will be affected.
Length of credit history accounts for 15% of your credit score.
- Pay off your debts slowly. Focus on debts with shorter payment periods such as car and student loans.
- Pay more than the minimum required amount on your credit card.
- When you’ve successfully reduced your total loans, say by 50%, consider getting a short-term loan with a lower interest rate to pay off your balances.
- If you want to cancel a credit card, cancel the most recent one you acquired.
The goal is to eliminate debt before you retire.
7. Start a Side Hustle
“What? I should continue to work while I’m retired?”
Think of the side hustle as a project you always wanted to start but you were too busy at work.
For example, baking is your greatest passion. Now that you’re retired, start a home-based business that delivers freshly baked goodies like cupcakes, bread, cakes, pies, and donuts.
Set a production limit so you won’t get overwhelmed with orders. You can promote your side hustle on social media:
“Try our freshly baked cookies. We only bake 250 pieces per day. Please order one day in advance.”
You might want to parlay your expertise into a consultancy career.
If you have been an accountant for 50 years, start an online consultancy business where people can ask for help managing their money, updating their corporate papers, and paying their taxes.
Hire one assistant accountant, a data encoder, and a virtual assistant to help you. It’s a business you can run even if you go on a vacation!
The goal of a side hustle is not to turn you into a Bill Gates but to keep you active and engaged in your later years.
A little bit of money trickling in isn’t so bad either!
Conclusion
It’s never too late to start saving for retirement and there are many ways you can do it.
You’re not limited to a traditional savings account and don’t get complacent because you have a 401(k).
Envision how you want your sunset years to be and manifest it into reality through consistent savings and smart investments.
If you’re thinking about a side hustle, you’ll need a website to run your home-based business. We can help you there!
Contact us and let’s start planning your future.
For now, use the website to share your knowledge and enhance your reputation with your target audience. That will be a fantastic starting point for building your brand.
