Best Ways to Save for Retirement

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1. Think of a Number

So how much money do you need to retire comfortably, anyway? We say that you should aim for eight times whatever your final salary is. The important thing is to take the guesswork out of how much you’ll ultimately end up with. That way, there are no nasty surprises, and you can accelerate your savings rate should you need to. Do that by determining a number, then building your spending and savings plan around that.

2. Start Early

Unless you’ve managed to master time travel, this tip will come as cold comfort if you’re beyond your salad days. Getting a jump on saving for retirement is just about the best piece of advice there is, however. And although many people on starting salaries would laugh at the idea that they can spare anything for retirement, the fact is that the longer you have before clocking out once and for all, the less you’ll have to sock away per annum. For example, assuming an annual return of 7% after fees, you’d have a million in your retirement fund by the time you hit 65 if you saved $4,830 annually starting at the age of 25. If you wait until you’re 40 to save for retirement, you’ll have to stash away more than $15,000 per year to get the same result. Speaking of the big 4-0, it’s the new 20!

3. But if you didn’t, all’s not lost

The fact that young folks aren’t eager to throw their hard-earned cash at a secure dotage isn’t lost on Uncle Sam. The U.S. government encourages workers 50 and older to save more than younger employees by offering catch-up contributions for retirement plans. It’s a chance for johnny-save-latelies to get back on track.

4. Invent your future with a pro

Don’t delay sitting down with a financial planner and start building an investment strategy to generate dividends that can’t be matched by a simple savings or money market account. 

5. Take Care of Consumer Debt Once and For All

The credit card industry exists because people want things sooner than they can save up to buy them outright. The debt that ensues is wasteful, expensive and one of the biggest obstacles if you need to catch up and contribute to your retirement. Get out of the quagmire by first paying off your highest interest balances. As each card gets paid off, use the freed-up moolah to accelerate the payoff of the remaining cards. While you’re doing this, commit to never spending more in a month than you can afford so you don’t accumulate new debt. Never settle for making minimum payments on credit cards — that makes compound interest work against you instead of for you.

6. Remember your ABCs: Always be cost-cutting

What’s a couple dollars here and a couple dollars there? you may think as you thoughtlessly buy cheap conveniences on Amazon. You’ll be shocked to discover that $5 saved at age 40 can compound to more than $1,000 by the time you’re in your 80s. Small differences in spending today can make a big difference in your retirement savings tomorrow.

7. Get a raise, then ignore it

Generally, the more money people earn, the more they spend. That usually means folks will get a better car and a nicer home with nicer things to put in it, but that doesn’t dramatically improve their financial security. Smart savers control spending by automatically depositing all raises and bonuses directly into savings accounts, where they can earn more income.

8. Switch employers

It may be in your interest to find an employer with pension benefits. (Some are out there.) If you can finagle a similar salary while simultaneously qualifying for a pension, you’re golden.

9. Select low-cost investments

Fees incurred through your 401(k) plan don’t sound like much, but over time, they can dramatically slow the growth rate of your money. Assuming a 7 percent annual return and fees and expenses of 0.5 percent, a 401(k) contribution of about $7,795 per year over 35 years will get you to $1 million. But if your fees are 1 percent higher (1.5 percent total), you’ll need to save $1,895 extra per year to make up for them.

10. Strike a match

A 401(k) match will make you a millionaire much faster than going it alone. But a word to the wise: Pay attention to your employer’s vesting schedule for the retirement plan. Until you’re fully invested in the plan, you may not get to keep employer contributions to your retirement account. In some cases, you might need to remain with an employer for five or six years until you can keep your match.

11. Mind the gaps with an IRA or similar

Chances are, at some point in your career you’ll change your employer, get laid off, stop working because of a serious illness, or even take some time out of the workforce. Any of these changes could interrupt the rate at which you’re socking money away for the golden years. To keep your retirement plan on track in the face of times like these, you may need to save in an IRA or a taxable investment account until you become eligible for a new retirement plan at work.

12. Leave it in

An early withdrawal can be disastrous to your dreams of having a million bucks in your war chest by the time you retire. Whenever you withdraw money from a 401(k) account, you’ll have to pay income tax on the amount withdrawn. And generally, those who withdraw money before they turn 59½ are also charged a 10 percent early-withdrawal penalty. Ouch! Keeping an emergency fund outside of your retirement account is a much better plan for a financial cushion.

13. Find the right balance of safety and growth

Chances are that your 401(k) portfolio probably won’t outperform the stock market year after year. In fact, smart savers should simply aim to capture the average growth of the stock market. In Stocks for the Long Run, author Jeremy Siegel’s research showed that for the period between 1926 and 2006, stocks produced an average real return of 6.8%. “Real return” means return after inflation. Before factoring inflation, stocks returned about 10% per year. Once you start to accumulate funds, protect it with a broad investment strategy that includes stocks, bonds, and cash.

14. Ratchet up what you save

People say that saving between 10 and 15 percent of your yearly income for retirement is a good idea. Others say that if you’re getting a late start, you may need to do a little better than that. Challenge yourself to stash a fifth of your take-home pay. You may find that rising to the occasion is less painful than you’d previously thought.

15. Make your savings account as real a monthly expense as anything else

If you set up an automatic payment to your retirement fund, you’ll be taking a huge step toward accumulating your pile, and you’ll feel less pain in the process. It’s a little bit of the “out of sight, out of mind” psychology: You won’t miss it if you never see it, and the slightly reduced pay will be offset by the great feeling of knowing your retirement savings are headed in the right direction.