Retirement. A phase you look back at the bygone days of your professional life and look forward to the second innings that is in store. It’s the period in life that eventually sets in, with a different life to experience. The quality of your retired life depends on the goals and finances planned and executed through the heydays.
Investing and Retirement
The word retirement rings the bell of investment with a solid foundation to successfully counter uncertain times. Retirement should not be a burden to overcome but a stage to relive fond memories. And, for this to happen, thoughtful planning of finances and investing cannot be stressed more.
Remember, investing predominantly focuses on ensuring a secured retired life. Of course, you may have several goals in life that can be achieved by investing. But financially sound retirement is the common chapter everyone looks forward to.
Saving or investing for retirement is a big chapter and needs you to apply your mind and soul into the system. If you don’t plan your investments diligently, you run the risk of not being able to maintain the standard of living you wish or need when you retire.
There are several aspects to look into while investing for the future, retirement in particular.
How much money do you need to retire?
It’s subjective, and it depends on your personal goals, your traits and your outlook towards life.
- Are you looking ahead for a world tour?
- Do you intend to move to a plush condo?
- Are you looking to live life relaxing in the countryside?
- Do you want to own a luxury car?
- Are you interested in golfing?
The list is almost endless, and each lifestyle or wish demands you know your finances well.
There is no fixed formula to save for retirement. However, the ideal way would be to save:
- At least your annual income by age 30
- Three times the annual salary by age 40
- Six times your annual salary by age 50
- Eight times the annual income by age 60
- Ten times your annual earnings by age 67
Let’s discuss about this in detail later in this article.
When should you start saving for Retirement?
Again, there is no specific age cut-out to begin saving for retirement. However, the sooner you start, the better. In other words, starting to save for retirement early gives your money a longer period to grow into a substantial amount. This practice ensures compound growth and, in turn, can increase your money by several folds.
Whatever your earnings, make sure to keep aside a certain amount to boost your emergency fund. Also, keep looking for ways to increase your earning capacity to increase your savings.
Tips to Boost your Retirement Savings
Follow these tips to grow your nest egg and to retire peacefully:
Start investing right away and let compound interest reinvest your savings and work for you. The more you invest during your younger years, the higher the accumulated amount will be.
Take advantage of your employer’s 401(k) plan
It’s a tax-deferred investment plan that employees can use it to their advantage. You can also increase your contribution to that account. Eventually, you can open a Roth IRA account to save income after taxes to avoid higher tax bracket in retirement.
Satisfy your employer’s match
Try to match your employer’s 401(k) plan to enjoy complete advantage of the plan. The 50% additional amount from your employer is essentially your free money to utilise.
Utilise catch-up contributions as you age
While nearing age 50, you can enjoy benefits beyond the prescribed limits of the IRA and 401(k). These catch-up contributions help boost retirement savings beyond age 50.
Switch your savings to auto mode
Making automatic retirement contributions every month helps constantly grow your nest egg. You can invest assets automatically in select funds through Merrill Edge Automatic Investment Plan.
Control your spending
It’s one of the secrets to increasing your savings. Make a list of your needs and wants and look for all the places where you can reduce or avoid spending. By this way, you can track your money efficiently and increase your investment.
Always set realistic goals
Investing also means setting benchmarks in the process and making necessary changes to achieve those goals. You can calculate how much you need to save in order to achieve your financial goals during retirement.
Be wise with extra funds
Got extra money? Got a raise? Don’t just spend that money. Instead, increase the percentage of investment and plan for a financially robust retired life.
Postpone receiving your social security payment to a later age
You begin to receive social security payment benefits at age 62. But, delaying receiving it until age 70 increases the accumulated amount. The additional income increases quickly and makes a significant difference to your retired life.
Let’s now go through detailed investing planning based on the age group.
Investing in your 20s
As you reach the end of your 20s, make sure to have at least your annual income in your retirement account. This is also the stage to start building your emergency fund. You can start small and draw cash from your emergency fund without touching funds from your retirement account.
This is also the stage to leverage the benefits of your employer’s 401(k) plan. You can also consider a Roth IRA account.
20s is the ideal phase to invest in stocks. With a long investment period, its perfect to handle the market dynamics and invest methodologically.
Investing in your 30s
This is the stage to boost your emergency fund and have at least double the annual income saved in your retirement account. It’s also great to tie up with your spouse financially and plan together for retirement.
You can speed up your retirement savings through an automated direct deposit.
Saving in your 40s
Your savings by the end of your 40s should ideally be four to six times your annual income. It’s that phase to get rid of debts without getting too conservative. All these years of savings for your children’s education come to the surface.
Put whatever additional money you have to your retirement account.
Saving in your 50s
Close to 60 and, you should have almost eight times your yearly earnings. Catch-up contributions should be utilised wisely and, a substantial percentage should go into your retirement account. It is here that you decide your retirement budget depending on the lifestyle you have planned. Also, keep medical costs in mind and plan accordingly.
Saving during the golden age
Come retirement and, consider using your social security benefits to your advantage. This is the surplus amount in your retirement fund you can claim.
Retirement savings barriers to overcome or take control of
Cost of living
When you receive a hike, don’t spend the additional raise for a fancier lifestyle. Instead, follow a monthly budget and stick to a fixed savings plan. See what you can do away with and make sure not to go above that which ensures you a comfortable life.
Excessive spending on kids
Doing many things for your kids’ is a good intention, of course. However, overspending on kids drains your nest egg and investment too.
Health can take a hit anytime and, in most cases, we are not ready for it. However, it’s advisable to open health savings account that comes with some major benefits. A tax-deferred medical savings plan covers almost the entire medical expenses subject to conditions.
Credit card debt
This is a major savings spoiler. Just remember, your credit card debt is nothing but consuming your future money that can rather be invested. Make sure to keep your credit card debt in limits. And, once you have paid off the bills, avoid the temptation to the maximum.
Avoid taking a 401(k) loan
Your retirement account stabilises your future. And, your 401(k) account adds immense benefits to your retirement funds. Here are some top reasons to avoid taking a loan from your 401(k) account:
Making contributions becomes difficult or impossible
There are select plans that don’t allow contributions until the current outstanding loan is paid off.
Additional fees will be charged
Your 401(k) account includes setup fees, annual costs and other costs. Though they are low on interest, drawing funds from the account increases the amount of fee to be paid.
Pay checks can get smaller
Pay check deductions are levied on most 401 (k) plans. It’s a double blow since you are paying out of your saved lower monthly income.
The risk of default is costly
Here, the loan that ends up as default invites income tax and penalty charges. Withdrawal can also show up as taxable income and reduces tax returns over the long run.
Loss of asset protection
401(k) accounts offer asset protection from creditors by Federal law. Drawing money from this account waives this protection, leading to increased losses.
Avoid taking a 401(k) loan by:
- Increasing monthly savings
- Keeping savings account easily accessible
- Replenishing your emergency fund in case you borrow money from it