Regardless of your age, planning for retirement should be critical component of your personal finances. However, many individuals choose to neglect saving for the future in order to serve more immediate needs. Failing to allocate enough resources toward retirement can result in having to work long past the normal retirement age.
Here are 5 ways to build your retirement savings:
1. Start Young
Building wealth doesn’t necessarily require an enormous paycheck. It simply requires time. For example, investing as little as $1000 each year, with an average growth rate of 10%, can turn into a $200,000 nest egg in 30 years. This is the result of interest compounding over time. Waiting until you reach 50 takes time out of the equation, meaning you will have to invest a significant portion of your paycheck without the aid of compound interest.
2. Automatic Investments
The best way to combat the desire to spend is to put it out of reach. One of the benefits of a 401K contribution is the money is taken from your paycheck before it enters your bank account. A matching contribution from your employer will only further increase your retirement savings. Even if your employer doesn’t offer a 401K, you can put automatic tax-deferred or after tax contributions into an IRA. As withdrawing from an IRA early results in penalties, you will have additional incentive to let the account grow.
3. Motivate Yourself to Save
Rather than visualize retirement as a number, think about it in terms of tangible goals. Normally, when people consider saving for retirement, they are saving for some distant, nebulous construct, something far less appealing than the here and now. That is why when you are debating whether to spend or save, tell yourself you are saving for that trip around the world, or weekends out fishing, and not for some vague and arbitrary number. Creating a tangible benefit will allow the future to better compete with the temptations of the present.
4. Age Appropriate Investing
Part of the importance of starting young is the ability to ride out riskier investments. Although past performance is no guarantee of future gains, stocks and aggressive mutual funds have a history of outperforming safer investments such as bonds and money market products. However, this typically holds true over decades of time, and in the short term risky investments can dissolve your nest egg rather than grow it. A smart investor will choose a financial portfolio that best reflects their age group as well as their opinions on the market.
5. Make a Budget
Often times, failing to build your retirement savings is not a product of being unable to save, but rather being unable to not spend. Constructing a budget and finding creative ways to meet that budget will allow you to save without sacrificing your personal life. For example, calculate how much you can save by taking a bag lunch to work, or eschewing high priced coffee in the morning. Remind yourself that all of these tiny expenditures add up, not only in terms of the money you spend but the compound interest you lose over time. If quitting cold turkey seems a bit extreme, try putting off such luxuries until the end of the week. You may find that the less you consume something, the more you appreciate it.
Joel Edwards writes for EquityRelease.net covering a wide range of retirement finance topics.
Hi, I’m Cathy! I’m a former career-driven professional turned stay-at-home mom. Living on one salary has its challenges, but it is possible to live the good life while spending less. Cool to be Frugal is all about how we’re thriving, not just surviving, on a single income.
