What’s the scariest scenario you can think of? Facing a grizzly bear while out for a walk? Jumping out of a plane? Both might be terrifying, but for nearly half of all Americans, not being financially ready for the future is a legitimate, well-founded fear. Because, unless the bear wins or your parachute fails, chances are you’ll live well past retirement age and into your 80s — or longer — meaning you could run out of money if you’re not prepared.
That means you’ll need a savings plan. And if you’ve ever wondered when the best time to get serious about funding your retirement is, the answer’s simple: right now. Regardless of whether you’re in your 20s or your 50s, socking money away is a crucial financial move, at least until you have enough to cover your living expenses for every year you’re not working.
You’ll likely need a tidy sum of cash. One rough estimate is that you’ll require 12 times your net salary saved up by the time you retire at age 65. Alas, unless you inherit a fortune or win the lottery, you’re probably on your own when it comes to saving: “For many people now, we are going to be responsible now for funding our own retirement as pensions have gone by the wayside,” Judith Ward, a senior financial planner at T. Rowe Price, said in a phone interview.
Indeed, while previous generations could often supplement personal savings with pensions — guaranteed monthly income from your employer available after you retire — fewer workers today have such coverage; instead, self-funded 401(k)s and IRAs are the default retirement vehicle for most workers. Some receive matching funds in their 401(k)s, but you can’t get those without contributing a portion of your pay in the first place.
And while fears that Social Security funds will disappear might be exaggerated, that safety net is only intended to pay out 40% of your pre-retirement income. In June 2017, for example, the average monthly benefit was just $1,369, which works out to about $16,428 a year.
In other words, unless you’re planning on spending your golden years in extreme frugality, it’s largely up to you to feather your own retirement nest.
Remember that calmly coming up with a plan is your best bet. “The biggest enemy of retirement assets is emotion,” said Ron Weiner, a certified financial planner and partner at RDM Financial Group at HighTower.
While it’s easy to find ballpark figures that tell you how much you should have saved at every age, it’s harder to find strategies to actually reach those goals.
To help you get there, here’s a blueprint for retirement saving that you can use at any age — even if you haven’t yet saved a dime.
1. How to save if you’re broke
Struggling to make rent this month? Saving for something that won’t happen for another 30 years or so may be at the bottom of your to-do list. But that kind of short-sighted thinking could lead to an unpleasant financial surprise in your golden years. So it’s smart to start setting away money now, even if just a little.
The good news is that retirement saving is doable, even if you’re drowning in unpaid loans. While some financial planners recommend being totally debt-free before you start saving, others advise merely wiping out your high-interest debt first. Here are some key steps to follow.
First know where you’re starting from
They say you can’t get where you’re going if you don’t know where you are. Applied to your finances, that means taking a look at two key metrics: your net worth and your cash flow.
Your net worth is the sum of all your assets minus your liabilities. Assets include any savings, investments, real estate or other valuable possessions like a car or wedding ring. Liabilities include student loans, credit card debt, a mortgage or any other money you owe. You want to know your net worth now so you can measure your progress over time as you work toward reaching your savings goal.
Next take a look at your monthly cash flow. “Look at your income, how much is going in and how much is going out,” said Roger Ma, certified financial planner of LifeLaidOut. What you’re looking at specifically is whether you have a little extra cash in your budget to set aside for retirement.
“You have to figure out where you’re spending your money in order to redirect it to other places,” Ward said. A budgeting app like Mint can help you see if you’re wasting cash, but you can also keep track of expenses on a sheet of paper if you want.
Zoom in on that “hidden” money
If you’re spending more than you’re making, there’s a good chance you’re either plundering your savings or racking up credit card debt. In the latter case, you’re going to want to come up with a plan of attack for paying that debt off. Take a good hard look at that budget you made (if you don’t have one, here’s one you can do in five minutes) for simple opportunities to cut costs.
“That process can help identify if there is any extra fat you can cut out,” Ma said. “You might have a sense of, ‘Oh my god, I didn’t realize I was spending $1,500 a month on takeout.’”
Most people’s biggest expense is housing, and there are lots of ways to save there, too. If you’re a renter, you can consider a roommate — which can save you hundreds of dollars each month — or trying to negotiate with your landlord. If you’re a homeowner, you could rent out a spare room or save on heating or dishwashing costs by using these tricks.
If you get creative, there are dozens of ways to save money on a daily basis; three of the easiest include giving up cable TV (for about $100 a month in savings), cutting back on restaurant meals (you can save about $1,500 a year by eating out once less per week), and slashing vacation costs.
Make a serious plan for getting out of debt
If you’re drowning in unpaid bills, it may feel hard to even know where to start. But you’ve got options. One approach is to “identify the debt that has the highest interest,” said Ken Hevert, senior vice president of retirement and college planning at Fidelity. It’s smart to pay that off first, because the interest can balloon over time.
Say you owe $2,000 on a credit card with a 16% interest rate. Even if you commit to paying $100 a month, it will still take you two years and cost you more than $340 in interest to wipe the slate clean. By comparison, if you’re paying only 8% in interest, you could pay off the debt two months faster and slash your total interest payments by more than half — to $154.
Now, a different trick is to start with the “snowball method,” or paying off your smallest debt first. While it might not make the most sense mathematically, because of the higher interest that accrues on bigger debts, the satisfaction of making progress can better motivate you to keep paying off those bills.
Finally, consider consolidating or refinancing any outstanding loans or debt you have to save on interest or lower your monthly payments (while extending the loan period) to make them more manageable. You can also use saving apps like Acorns or Digit to start squirreling away money — mindlessly.
2. How to save if you’re busy or distracted
If you already have that “hidden” cash in your budget, but you haven’t had time to figure out what to do with it because you’re too busy with work or life, now it’s time to find a place to park your money — and get focused.
Make your first stop: the company 401(k)
If you’re covered by a 401(k) retirement plan at work, that’s usually a safe bet for two big reasons. First, the money comes out of your paycheck before you ever see it (which also helps reduce your tax bill), and second you may be able to get an employer match. “Any match you are getting from an employer is essentially free money,” Hevert pointed out.
Since you won’t get taxed on the money you invest in a 401(k) until you withdraw it in retirement, your savings get to compound without the tax dings you might get with a brokerage account. Plus, the fact that it lowers your taxable income can be especially handy for offsetting taxes you might owe on side income (that doesn’t normally include IRS withholdings).
Or try the easy DIY option: an IRA
If you don’t have a workplace 401(k), the next place to park your cash is a Individual Retirement Account or IRA. Most people have two choices, either a traditional IRA, which works much like a 401(k) — in that the funds you put in reduce your taxable income by the same amount, and your savings grow tax-deferred — or a Roth IRA, with which contributions are made post-tax, but that means you can take out your money tax-free in retirement.
“For younger people especially, a Roth IRA makes a lot of sense since your income will increase so you will be in a higher tax bracket later,” Ward said. “With tax reform, tax brackets are going to be lower, so this is a great opportunity to take advantage of a Roth.”
Here’s Mic’s guide on how to open an IRA.
Then choose a simple fund mix
The investments you should put your money in depend on how much risk you are willing to take. If you’re in your 20s or 30s, anywhere from 70% to 90% in stock is typical. Exchange-traded or index funds tend to have relatively low fees, and allow you to buy a mix of stock and bond funds. If you’re investing in the company 401(k), your money may be automatically funneled into a fund for you — but it is worth checking out the other options on the menu, in case there’s a more diversified option with a lower expense ratio (read: fees).
As for how much of your salary you’ll want to invest, Ward recommended saving about 15% of your annual income, including any match you’ll get from your company. To get a better gauge of how much you’ll need to save, it’s helpful to use a retirement calculator that accounts for factors like Social Security and interest on your investments.
Using the Fidelity calculator (shown above), you can see a 30-year-old earning $50,000 a year who contributes $600 a month (a little less than 15% of income) in aggressive growth investments will reach only about 70% of their goal — living off the same amount of money they earn now, at age 65.
However, if they retire just three years later, at age 68, they could be at about 80% of their goal — and if they bump up their savings to $700 a month they’ll be at about 90% of their goal.
If you can’t stash away 15% of your earnings each month, consider a few work-arounds. If your employer matches your contributions, for example, you may need to put away only 10% of your earnings to reach the 15% goal, assuming your company kicks in the difference.
And if even that is a stretch, just put in what you can. Don’t beat yourself up if you can only put in 5%, for example. Something is better than nothing. Perhaps more important than the amount you contribute to start with is the fact that you are doing it on a regular basis.
“Automate your contributions,” Hevert said. “You eliminate the emotion you have with your money because it is happening automatically. You eliminate the stress that comes with timing the market.”
3. How to save if you’re an overachiever
Once you’ve got the basics down — including saving regularly and increasing your contributions as your budget allows — it’s time to learn some pro trips for accelerating your returns. Here are three ways to get even more money in your retirement account, whether you’re getting a late start or just want to live high on the hog in retirement.
Put side savings toward retirement
You really can trick yourself into saving by funneling any unexpected discounts or windfalls into a retirement account.
Got a rewards credit card? Instead of using those points or signup bonuses to buy more stuff, cash them out and put that money right into your Roth IRA. Love to coupon? Commit to putting half your savings away for retirement as well. Or: got some cash from your folks — or a bonus from your boss — over the holidays? You know where that dough goes.
Really catch up — and get ahead
If you’re getting a late start, the good news is you really can catch up fast. While normally both 401(k)s and IRAs have annual contribution limits of $18,500 and $5,500 respectively, anyone 50 or older can put an extra $6,000 or $1,000, respectively, into those accounts.
But anyone of any age can also play catch up — by maxing out their regular contributions if they haven’t already done so, or even using their Health Spending Account as a savings account for out-of-pocket medical expenses, since it has the same tax advantages as IRAs.
Still want to save more? You can always save extra cash in a regular, taxable brokerage or investment account. Since it’s hard to predict whether your annual income will be more or less in retirement, having some money in tax-deferred accounts like a 401(k) or traditional IRA, some in a Roth IRA and any extra funds in a taxable account gives you more flexibility come tax time, thanks to what’s known as “tax diversification.”
Finally: Learn to do nothing and relax
It is tempting and sometimes even fun to constantly check your retirement savings balance to see how you’re doing, but Weiner advised against that. “I think checking too often is a mistake because that creates emotion,” he said.
It’s okay to check in once every six months or so — and smart to consider rebalancing your asset allocations, to make sure you are not overexposing your retirement funds to more volatile equities, for example.
That’s because a rocketing stock market can cause asset allocations to drift away from your original mix. As an example, a portfolio weighted 60% in stocks and 40% in bonds five years ago would have swung to 75% stocks and 25% in bonds today, assuming you reinvested all your gains. If we had another stock market tumble in 2018 like we did in 2008, you could lose more than a third of your total assets in one fell swoop.
But there’s a reason — beyond peace of mind — to chill out. If you look every time the market goes up or down, you could lose sight of long-term goals and switch to a style that is more aggressive or conservative than you intended. Instead, come up with a plan and stick to it. And finally, stop worrying.
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