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Think back to your most recent savings goal. How long did you have to save in order to reach it? Was it a concert ticket or some new shoes that took a few weeks of budgeting? Was it a big-ticket item like a new computer or a summer vacation that took a year or two of planning in advance? Perhaps you’re currently saving for an even more ambitious goal: a car, a wedding, a down payment on a home? Although savings goals vary from person to person and range in size and scope, it’s likely that your longest-term savings goal will be your retirement.
Saving for retirement poses some unique challenges: How are you supposed to prioritize retirement savings against the long list of more immediate goals? How are you supposed to find the motivation to prepare for something that’s decades away? How can you quantify the amount you will need to save when you have no idea what your future will look like?
The good news is that you can boost your retirement savings by practicing the same good money habits that apply to smaller savings goals.
No matter what combination of financial goals you have in the works, this is the top priority. Think of it as creating the right environment for your savings to grow. Savings thrive when they have long stretches of uninterrupted time in which to accumulate and compound, so it’s in your best interest to eliminate any obstacles that threaten those ideal saving conditions. Focus on paying off any high-interest debt—you know, the kind that sucks up money that could otherwise be going toward your goals (credit card debt is an example). Revisit the terms of any loans you’re paying off and do a little research on potential consolidation or refinancing options—you might find a way to pay down your debt more efficiently and free up some extra funds for your savings goals at the same time. Eliminating roadblocks also means having a healthy emergency fund in place, so that your savings progress doesn’t get wiped out by an unexpected job loss (a good starting point is three months’ worth of expenses).
So your emergency fund is set up and your debt-management plan is in place—now is a great time to see if there are ways to automate your savings at work and at home. Can your employer automatically deduct your retirement contributions from your paycheck? Can you set up your online banking system to regularly transfer a certain amount to your savings account? Look for ways to make the act of saving easier, more consistent and less time-consuming.
One of the reasons it’s hard to get motivated about saving for retirement is that it’s an abstract concept—especially when pitted against more self-explanatory savings goals like “new car” or “tropical getaway.” Take 10 minutes to ask yourself a few basic questions and to design your ideal retirement: do you see yourself relaxing at the beach, or enjoying a beautiful home and watching your family grow, or pursuing a passion or hobby you couldn’t make time for in your working years? Does your ideal retirement mean indulging yourself, or would you prefer to downsize and keep things simple? Would you want to continue working (part time or in some capacity) throughout your retirement? Do you picture moving into a new space? A new city? A new country? Fleshing out the details of an otherwise ambiguous savings goal allows you to ground the goal in reality and to get excited about it—and it’s easier to contribute to a savings goal you’re actually excited about.
Increasing contributions to your savings goals (usually) means decreasing your monthly spending. This doesn’t necessarily mean adopting a super-frugal lifestyle; however, if that’s what you want to do to get to your goal sooner, go for it! Create some monthly challenges (like a month of packed lunches, or a month of free things to do) to see the impact of spending a little less. Put the money you would have otherwise spent towards your savings goals. If you live with a partner, challenge yourselves to live off of one income, and put the other toward savings. You will soon discover that spending a little less here and there does not require a complete lifestyle overhaul. Understanding the give-and-take of budgeting is a powerful skill, and it’s easier to cut spending when you can put it in the context of achieving a goal. Canceling a cable package “just because” is not an enticing idea—but what if you knew that canceling that cable package and investing the money saved would allow you to retire four years sooner? Having the right motivation can make it easier to save.
This tip is an extension of living with less. Try to maintain your current lifestyle and expenses even as your salary rises over time. As your income increases, increase the amount you contribute to your savings goals. It’s very easy to slip into a slightly larger lifestyle after a raise. It’s equally easy to treat unexpected income as “extra money,” whether it’s a bonus at work or $20 in a birthday card from Grandma. There’s nothing wrong with rewarding yourself from time to time, but limiting your living expenses—even in times where you don’t have to—will free up more resources for your long-term savings goals. More importantly, you’ll be better prepared should your income levels take a hit. Allow your savings to scale up with your income, but don’t let your expenses scale up along with them!
Saving for Retirement Someday you will be an old person. Sorry to remind you, but it’s true—and the sooner you accept the fact, the more prepared you’ll be to build the kind of retirement lifestyle you want. Timing is everything Saving a little now is better than saving a lot later. Your retirement will likely be the longest-term savings goal of your entire life. The earlier you start saving, the more time your contributions have to compound and grow. It pays to start saving early: Let’s say you put $10,000 in your 401(k) and do nothing further until it’s time to withdraw the balance at age 65: • If you put the $10,000 in at age 25, you’d have $217,000 at age 65* • If you put the $10,000 in at age 35, you’d have $100,000 at age 65* • If you put the $10,000 in at age 45, you’d have $68,000 at age 65* *Based on an 8% average annual return “The same investment can be worth a lot more when given a little bit more time to grow!” Retirement accounts Retirement accounts are designed as an incentive to save for retirement and act like containers for your various investments. As long as your investments remain in the container, they can grow and accumulate tax-free. Comparing options: The most common retirement savings accounts include Traditional IRAs, Roth IRAs and 401(k)s. Where can I set one up? • Traditional IRA: At your financial institution • Roth IRA: At your financial institution • 401(k): Through your employer What are the annual contribution limits? • Traditional IRA: $5,500 (combined IRA limit) • Roth IRA: $5,500 (combined IRA limit) • 401(k): $18,000 (if you’re under the age of 50) Are my contributions taxed? • Traditional IRA: No, contributions are made with pre-tax dollars—contributions may be deducted from your income tax return for that year • Roth IRA: Yes, contributions to a Roth IRA are made with after-tax dollars and cannot be deducted from your income tax • 401(k): No, your 401(k) contributions are pre-tax—they come directly from your salary and are not counted toward your taxable income that year When can I make withdrawals? • Traditional IRA: After age 59½ (to avoid penalties) • Roth IRA: After age 59½ (to avoid penalties) • 401(k): After age 59½ (after age 55 in some cases) Are withdrawals taxed? • Traditional IRA: Yes, distributions in retirement are taxed as ordinary income • Roth IRA: No, qualified withdrawals in retirement are tax-free • 401(k): Yes, distributions in retirement are taxed as ordinary income Are there any penalties? • Traditional IRA: An additional 10% in taxes is charged on early withdrawals • Roth IRA: You may have to pay taxes and penalties on the earnings in your Roth IRA when you make early withdrawals • 401(k): Most early withdrawals are taxed as ordinary income and charged an additional 10% penalty fee What makes it a good option? • Traditional IRA: Because Traditional IRAs are self-directed, you can choose from a wide range of investment options • Roth IRA: Unlike Traditional IRAs, Roth IRAs have tax-free withdrawals and have no RMDs (required minimum distributions) • 401(k): Your employer may offer company match on your 401(k) contributions—free money! What should I look out for? • Traditional IRA: Traditional IRAs have RMDs, meaning you have to start withdrawing funds after you reach age 70 • Roth IRA: Unlike the other options, Roth IRAs will not give you tax breaks on your contributions • 401(k): Limited investment options and higher fees are sometimes associated with 401(k) plans Just so you know… the comparison chart above is a simplified guide. Full details and exceptions are not listed here. If you’re looking to learn more, visit the IRS.gov website or get in touch with your credit union. Starter plan Retirement savings plans are not “one size fits all,” but the following steps are often recommended: 1. Contribute enough to meet your 401(k) match 2. Switch over and max out your Roth IRA contribution 3. If you have money left over, top up your 401(k) Why? This strategy nets you the free money from your employer match and also takes advantage of your Roth IRA’s tax-free withdrawals. Strategic saving These tips will help you protect and grow your retirement savings: • Eliminate high-interest debt: In order for your money to grow, you need to create the right environment—paying down credit cards (and other high-interest debt) should be your #1 priority • Build an emergency fund: Life happens, but the last thing you need is an unexpected expense taking a bite out of your savings—build an emergency fund to protect your financial goals • Maximize your repayment plans: Revisit your loan terms and see if there’s a smart way to consolidate or refinance your loans in order to free up extra cash for savings • Ditch the excuses and start saving today: Time is on your side when it comes to retirement savings—start small if you have to, but start saving today Sources: Investopedia, IRS.gov, NerdWallet, The Motley Fool, Time Inc.