Saving money (and being smart about how you do it) is one of the best steps to a comfortable retirement. The good news is there is no single best way to save, and you can even combine a couple options together. You have multiple options to start building and increasing your nest egg. Read on to find 11 tips to secure your financial well-being during your sunset years.
Best Way to Save for Retirement | 11 Ideas to Have Money While Enjoying Your Old Age
1. Do Not Wait to Start Saving—Start a Retirement Account Today
The best way to save for retirement is to open an account solely for it. The true power of a robust retirement savings account lies in your capital’s ability to work for you.
Within retirement accounts such as IRAs, 401(k)s, and certain certificates of deposit (CDs), you have the ability to invest in assets that earn compound interest. It means you will earn interest on the interest of your deposits and contributions.
Starting early is the key to taking full advantage of this. For example, consider an individual who saves $100 per month in a retirement account that earns a 5% return with interest compounded annually:
- 10 years, $15,499
- 15 years, $26,590
- 20 years, $40,746
Thanks to compound interest, your retirement fund grows with the same principal balance, nearly tripling with an extra 10 years of saving.
2. Determine Your Long-Term Goals and Set Milestones
Rather than arbitrarily putting money away each month, determine and set realistic retirement goals. You can also establish milestones for how much you want to save each year and how much you will have saved in the next 10 years to keep your accounts and retirement on track.
There are two methods for estimating the amount you need to retire. One uses your current pre-retirement income. The other one, which is more reliable, considers your savings goal based on your estimated annual expenses and lifestyle during retirement.
3. Assume the Cost of Living and Healthcare Will Increase
Another one of the best ways to save for retirement is to anticipate future expenses. While most individuals spend less (just 70% to 80% of current expenses) during retirement, many forget to think about the increased cost of living, which happens naturally over time, and the higher cost of long-term care that accompanies aging.
Throughout retirement, couples could wind up spending an estimated $280,000 on healthcare expenses alone–a hefty figure, considering the average 401(k) balance rings in at only about $103,000.
If you are having a hard time figuring out how much you need, you can use a retirement calculator.
4. Automate Your Savings
Set up an automatic transfer with your bank or your company’s human resources department to save without having to think about it. When funds transfer automatically, paying your savings account seems more like settling a necessary bill. It also means you are less likely to miss the money or spend it on something else.
5. Use a Budget to Live Below Your Means
Another way to save for retirement is to follow the classic rule of personal finance: never spend more than what you earn. In fact, it applies even if you can afford driving an expensive car, wearing designer clothes, and frequenting fancy restaurants.
Even small savings will make a noticeable impact on your retirement. Simply foregoing your daily caffeine fix could mean big bucks. Establish a reasonable monthly budget and dedicate a portion of your next raise exclusively to retirement savings.
6. Save Extra Cash
When you receive a bonus, an inheritance, or a tax refund, you may be tempted to cash in on a vacation or a new television. The money, however, may go much further if you deposit it into a retirement account or investment.
By putting away unexpected cash, you give it the potential to grow, turning a small windfall into a major storm.
7. Safeguard and Maximize Retirement Savings by Diversifying
As the saying goes, you should not put all your retirement “eggs” in one basket. Diversification protects your retirement from both the unpredictable nature of changes in the market and the predictable nature of inflation. Diversify your retirement savings with different types of accounts, investments, stocks, bonds, annuities, mutual funds, real estate investments, and precious metals.
8. Participate in Your Employer’s 401(k) Retirement Plan and Match Their Contribution
If you have access to employer-sponsored retirement plans such as a 401(k), participate in it. These plans allow you to automatically save pre-tax dollars every pay period. They also often include savings incentives, such as contributions matched dollar for dollar by employers (which is basically free money).
If you face financial limitations, then contributing just enough to meet an employer’s match probably makes the most sense for your finances. If you can afford to, however, you should contribute more. Your employer may match only up to 3% to 5% of your pay, which isn’t to be overlooked, however, if you can put away more, it’s a good idea.
9. Start an IRA
For many people, including self-employed individuals, the best way to save for retirement or grow retirement income is to open an individual retirement account (IRA). You can also have one even if you already have existing retirement savings accounts and investments.
There are many types of IRA, so there is a high chance you can find one that matches your needs and retirement goals. Either way, it does not break the bank. You can contribute only up to $5,500 a year.
10. Take Advantage of Catch-Up Contributions after Age 50
Some people may have started later when it comes to retirement planning. If this is you, do not fret. The best way to save for retirement is to give catch-up contributions on your IRA.
At age 50, whether you have been saving for decades or have started late, the IRS allows you to increase your annual IRA contribution limits. You can add up to $6,500 to your account.
* Note: While this will help to compensate for lost time, there really is no replacement for starting early and saving consistently.
11. Wait to Begin Collecting Social Security
Delaying your first Social Security check past retirement age boosts the amount you stand to receive monthly later. The exact increase in your benefits will depend on several factors, but waiting a little longer can mean 8% more money later.
There is no best way to save for retirement as there are many methods to do it. Regardless of which you choose, try to start saving for retirement right away. Every day you wait to save is a day you lose compounding interest and delay your potential retirement date. Talk to a retirement planner for guidance.
What do you think is the best way to save for retirement? Tell us your thoughts in the comments section below.