Saving for your retirement is a given. But, how much money do you need to set aside to enjoy your golden years?
How does a million bucks sound?
That may not sound feasible, but it’s not as challenging as you think if you follow these eight strategies.
1. Start saving as soon as you can.
The younger you start saving, the less amount of money you’ll have to put aside each month. For example, if you start saving $405 per month at the age of of 25, and are receiving an average annual return of 7 percent, you'll make you a millionaire by age 65. If you wait until later in life to start your savings, you’ll have to devote more money each month to catch-up.
You can use Bloomberg’s handy 401(k) Savings Calculator to give you a better understanding of how much you’ll need to save to reach your retirement savings goals.
2. Live below your means.
Here’s one of the best pieces of financial advice I’ve ever come across. You can only save money two ways. Either make more money or spend less money. In most cases, it’s a whole lot easier to cut your spending and live a little more frugally.
This means purchasing a modest home, practical car, scaling back on the pricey vacations, clipping coupons, and creating a budget so that you can track your spending. Even though my wife and I make a lot of money, we save 90 percent of what we make.
In fact, authors Thomas Stanley and William Danco found in their book "The Millionaire Next Door" that a majority of millionaires reached that goal by spending less than they earned.
3. Make saving automatic.
We’ll make this point quick and easy. Select the amount of money you want to save each month and have it automatically withdrawn from your paycheck. If you’re stuck on where to place this money, start with a 401k or other employer-based retirement plan.
When you have this money taken out instantly, it prevents you from spending it. Some people find it an advantage to start with a percentage of their income rather than an actual dollar amount. If you are having trouble starting, begin with 2 or 3 percent of your income and add another percent each year. The point is to begin.
4. Choose your investments wisely.
Savings accounts and certificates of deposit are an alright place to start. But, if you really want to grow your wealth, invest in stocks.
While there is definitely a risk involved, Walter Updegrave writes in CNN Money that you “go with a portfolio that will give you a shot at realistic gains but you'll also be comfortable sticking with during major market setbacks.” This is done by taking a risk tolerance test - Vanguard’s asset allocation-risk tolerance tool can help with this.
Updegrave adds, “As for choosing investments for your portfolio, I recommend you focus mostly, if not exclusively, on broadly diversified low-cost index funds or ETFs, many of which charge just .2 percent of assets or less in annual expenses. The reason is simple. The less of your return you give up to fees, the more quickly your savings are likely to grow, and the more likely you'll reach your ambitious goal.”
5. Pay down your debt.
Let’s say that you have a credit card with a balance of $5,000 and an APR of 22 percent. You’re spending $1,000 annually in interest alone! I personally played this game when I was in my early 20's. I did it for almost three years until I realized I'd paid more in interest that was on my credit card in the first place.
Get rid of that debt immediately. Even if you have to put aside saving for a a couple of months or even a year, it’s totally worth it in the end since you can now put that monthly payment towards your retirement savings and not an outrageous interest rate. Understand payments and how they can work for you.
6. Don’t touch your 401(k).
After you’ve finished this article, head over to Bloomberg and read "How a Harvard Economist Screwed Up -- and Then Saved -- Her Retirement."
In a nutshell, it details the mistakes that retirement expert Alicia Munnell foolishly made during her 50s. One of the worst mistakes was using retirement savings for her current lifestyle needs. This included tapping into her 401(k).
"I used my after-tax account like a bank account," she says. "I used it to pay for the honeymoon of one of my sons. I was a little cavalier. I'd tell anyone else not to touch it, ever."
Remember, when you withdraw money from your 401(k) you taking away its ability to grow.
7. Pick-up free money.
You read that correctly. There is free money that is available for you to put towards your retirement.
- Max your 401(k) by taking what your employer matches.
- Open a spousal IRA if you or your spouse don’t have access to a 401(k).
- Conduct a Roth IRA analysis to calculate the cost of converting past IRA savings to a Roth IRA.
- Consider a health savings account that will allows you “to put aside money pre-tax you would spend on health care anyway (billed services, not premiums), and if you don’t spend it then the money rolls over each year while still earning interest.”
- Cut back on investment costs like mutual funds and certain 401(k) plans.
8. Increase contributions.
Did you know that after the age of 50 you can increase contributions to tax-deferred savings plans. This means that you can use those taxes that would have gone to the government and put it towards investing.