Retirement Strategy: 6 Useful Tips To Live Off of Interest Alone in Your Golden Years
The importance of saving for retirement cannot be overstated; fewer and fewer people have pensions today, and the typical Social Security payment is currently around $1,500 per month. While retirees typically have lower expenses than those who are working, experts generally recommend maintaining about 80% of your income after leaving the workforce.
For most Americans, Social Security benefits will come up far short of that amount on their own. However, leveraging a few simple strategies will ensure you have enough income in retirement — even without Social Security or a pension.
Starting with these strategies will put you on the right path, and if done right, they don’t require you to be a high earning in order to have a financially secure retirement.
Contribute To an Employer-Sponsored Plan
The first step for anyone who wants to set themselves up for a financially secure future is to contribute to an employer-sponsored retirement plan. These plans offer tax advantages, and many employers make matching contributions, allowing you to leverage your money even further.
“First, if your employer offers a retirement plan such as a 401(k), contribute the maximum amount you can,” said Ben McLaughlin, president at SaveBetter. McLaughlin recommends taking advantage of tax deferrals and contributing as much as possible to your plan. Most experts suggest contributing the maximum amount that will be eligible for employer matching as it is considered free money.
If you happen to be self-employed, experts also recommend a SEP IRA or SOLO 401(k), which you can open with any major broker. These plans have higher contribution limits and can play the role of your typical 401(k).
Take Advantage of Employer Matching
With employer matching, employers match your contributions up to a certain percentage of your salary. For example, they may match up to 6%; in this case, if you make $50,000 per year, they will make matching contributions of up to $3,000. So if you contribute $3,000 into your 401(k), your employer will contribute $3,000 without any extra work or expense on your part.
Starting early may seem simple, yet it’s one of the most powerful things anyone who is saving for retirement can do. There are many reasons for this, such as the ability to take advantage of more employer matching and making more tax-advantaged contributions to your retirement plan. However, the biggest reason to start early is the magic of compounding.
Richard Tatum, president of retirement services at Vestwell, said compounding is key to building your retirement nest egg. “There’s a reason why Einstein called compounding the eighth wonder of the world! Compound interest is the interest you earn on top of interest – and that can really add up. If your account increases from investing properly, the impact of growth over time can make a huge impact.”
Open a Roth IRA
Employer-sponsored retirement plans are one of the easiest ways for employees to save for retirement, and matching contributions make them a no-brainer in most cases. However, these plans can often have limited investment options and may put you in mutual funds with high management fees. Thus, experts often recommend opening an individual retirement account (IRA) if you have contributed up to the matching limit and want to save more.
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“If you are looking to save for retirement outside of your work plan, check the income requirements and restrictions (believe it or not you can make too much) for a Roth IRA,” said Matthew J. Curfman, CFP, president and co-owner at Richmond Brothers, Inc.
Curfman also has some tips for making your Roth contributions easy. “Set an automatic monthly investment from your bank account to your Roth IRA for up to $500 per month so it happens like clockwork. Plus, this gives you the added benefit of dollar-cost averaging into investments through the year.”
Make the Robots Do It for You
By now, we know that investing is one of the best things you can do to set yourself up for financial security in retirement. But if you have to manually transfer money every month, you may not always remember to do so, missing out on some all-important compounding.
Paul Tyler, chief marketing officer at Nassau Financial Group, recommends having the robots do it for you. “Set up an automated transfer from a checking to a savings account the day after each paycheck gets deposits. Start with a small amount and be surprised with results down the road,” Tyler said.
Increase Your Contributions Over Time
When you begin your working life, your income will probably not be very high. You will likely be starting in an entry-level position with an entry-level salary. Thus, your retirement contributions will probably not be very big, either.
But as you make more money, Tatum recommends increasing your retirement plan contributions. “Every time you get a raise, give your future self a raise and increase your contributions to your retirement plan,” Tatum said.
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