Planning for retirement is something that everyone has to go through at one point. Whether you’re a doctor, a regular employee, a business owner, or a freelancer, you need to have a solid plan that will ensure your financial wellness in the future. Unfortunately, a lot of people fail to save enough money for retirement especially without a well-detailed plan. Take note that there are simply too many factors—big and small—that can affect your cashflow over the years.
To make sure you have enough money for retirement, below are the best practices and tips you need to remember:
1. Start Early
The number one rule in preparing for retirement is to start early. The earlier you start, the more comfortable you will be throughout your earning years because you are not pressured to save more just to “catch up”.
Starting early is also a powerful concept if applied for investments. Keep in mind that you will also encounter countless opportunities to reinvest your earnings and make a fortune with compound interests. With more time to prepare, you can expose yourself to more of these opportunities and save money faster.
2. Identify Your Goals
Successful retirement is indeed a great achievement. But first, you must identify your goals to help track your progress and plan your course of action. Setting your goals also heightens the sense of accomplishment once you achieve them.
When it comes to retirement, make sure you know how much money you need once you reach a specific age. You can use an online retirement calculator to have a complete view of the entire journey. Once you have your goals, you can adjust and tweak the way you handle money to ensure you stay on course.
3. Contribute to your 401(k)
For most people, a 401(k) plan is one of the pillars for a successful retirement. It works by allowing you to contribute a portion of your income to a set of investments such as mutual funds, real estate, and annuities. If you’re an employee, you usually have the option to pick the investments you want, so be sure to learn as much as you can about them.
Keep in mind that you can also rely on 401(k) plans even if you’re a self-directed individual. With the Solo 401(k) or Individual 401(k) plan, self-employed individuals such as independent contractors, freelancers, and consultants can receive the benefits of a traditional 401(k) plan with more flexibility on how much they invest.
4. Automate Your Savings
Saving up for retirement can be time-consuming especially if you don’t take advantage of automation. Fortunately, most modern investment firms online and offline feature automated funding services to help you stay ahead of your financial goals. Merrill Edge of the Bank of America Corporation, for example, offers the Automated Funding Service which allows customers to make timely contributions to a retirement account.
Automated reinvestments are also common in various investing platforms. These systems typically work by reinvesting income gains such as capital gains and dividends. However, there are both pros and cons to implementing such a strategy, so be sure you know calculate the risks and educate yourself more depending on your type of investment.
5. Consider an IRA
An Individual Retirement Account or IRA is a savings account with tax advantages. There are two popular types of IRA plans: the Traditional IRA and Roth IRA. In traditional IRA, you can contribute your pre-tax or after-tax money in an account with tax-deferred gains unless you withdraw money or reach your retirement.
Roth IRA, on the other hand, makes use of after-tax money to make sure withdrawals and earnings remain federal tax-free as long as specific conditions are met. For example, a Roth IRA earnings or interest can only be withdrawn tax-free after five years–under the effect of the five-year rule.
If your employer offers to “match” your contributions, make sure to invest just enough to make the most out of it. Take note that there is a percentage cap on how much money employers can add to your contribution. For example, if your employer matches 50% of their employees’ contributions but has a cap of 3%, a $5,000 contribution from a $50,000/year salary will only add $1,500 instead of $2,500.
6. Keep Track and Lower Your Spending
Cutting down your spending to hasten the accumulation of your savings is self-explanatory. However, simply telling yourself to spend less on discretionary expenses is never enough to make any real changes. You need to make an active effort to make sure you stay within a budget.
Today, there are several user-friendly money management apps you can use to stay ahead of your finances. Bear in mind that monitoring your spending will give you a clearer picture on your retirement journey. It will also encourage you to get creative and find ways to save money in everyday things—from taking public transportation to skipping overpriced coffee.
Saving enough money for retirement is crucial if you want to lead a fulfilling and financially-secure life. Once you learn the tips and practices above, make sure the thought of retirement planning doesn’t leave your mind until you put some action into it. Remember—the earlier you start, the better.