Whether you’re a few years from retirement age or just beginning your professional career, it’s never too early to think about retirement savings. Maybe you’re already part of an employer-sponsored retirement plan – that’s a great place to start. However, it’s also important to consider other ways to increase your retirement savings.
Check out these five steps to get you on your way to a retirement with less stress and more savings.
Step #1: Calculate What You’ll Spend in Retirement
Seeing a concrete figure of how much money you can expect to spend in retirement is extremely important. This number will give you a target to work toward and tell you if your current saving methods are on the right track. Consider the cost of housing; household expenses like clothing and groceries; discretionary funds for travel and leisure; and anything else you’ll need to enjoy your post-work years. A good rule of thumb is to assume that your retirement expenses will be around 80% of current expenses – but this varies for everyone. That figure could be higher or lower, particularly depending on medical needs and if you’re planning to move.
Finished your calculations and concerned that your retirement savings won’t match your expected retirement expenses? Read on!
Step #2: Open an IRA
An IRA (Individual Retirement Account) is an important vehicle to increase your retirement savings. IRAs are tax-advantaged, which means you get more bang for your buck than a normal savings account – and simply opening an IRA is great motivation to stash away money you might otherwise be tempted to spend. Talk to your credit union or bank about opening an IRA and remember that to take full advantage of an IRA, you will likely want to invest whatever money goes into the account. While investing always represents a risk, it’s also true that historically, IRAs deliver annual returns between 7% to 10%. With careful consideration of your risk tolerance and timeline, plus speaking with a financial expert, you can find the right investment strategy to help increase your retirement savings.
Step #3: Max Out Employer Contribution Matching
Many employers who offer a 401(k) retirement plan will also match all employee contributions, up to a certain dollar amount. Double check the terms of retirement savings at your workplace. If you’re currently making minimum contributions on a matching plan, it could be in your interest to bump these up – so more money will go from your paycheck to your retirement account every month, and your employer will put in more money, too. Many people don’t realize they’re eligible for what amounts to free money, so don’t lose out on this opportunity! What’s more, 401(k) contributions are tax-advantaged, so higher contributions could mean a lower tax bill at the end of the year.
Step #4: Set Aside Surprise Money
There’s a certain category of money that comes into our lives as a happy surprise. It could be a bonus at work, a birthday check from grandma, or just a quarter lying on the ground. However it makes its way into your wallet, make a new rule: surprise money goes straight into retirement savings. This technique is often easier than reducing other spending, as it’s money you weren’t planning to have in the first place.
Step #5: Think Small
Ultimately, the best wave to save more is to spend less. If you can trim around $5 a day, you’ll save $100 a month. With $100 a month in a retirement account receiving compound interest, you’ll gain over $200,000 in 25 years – and that’s assuming a very moderate 6% rate of return. How to cut down on everyday spending? Consider:
- Cancel unused subscriptions: It’s easy to forget what services you’re subscribed to. Review your bank statement with a fine-toothed comb, list subscriptions and see what you can do without. Also, there’s almost never a disadvantage to stopping for a few months to see if you miss it, then re-starting the subscription. There might even be a special deal for new subscribers!
- Re-evaluate insurance and bundle: Check with your insurance providers to see if they offer any discounts on bundled coverage. If so, you might save money by taking advantage of a multi-policy discount with a single provider.
- Go car-free: Try going car-free for one or two days a week, as the savings on gas and parking can add up fast. Once you form the habit, you might even find yourself walking or biking more often: which is great for your savings account, and the environment.