How to Save for Retirement

Save for Retirement
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One of the questions that we get asked most frequently is when is the best time to start saving for retirement. We always give the same answer - it's never too early to start saving for retirement, but it is also never too late to start doing so.

When is the right time to start saving for your retirement? Right now!  Saving for the future is one of the most difficult things to do. Our brains are wired to worry about what is in front of us rather than planning for the future.

This is a skill we developed during our cavemen days and haven't managed to shake off yet.  Putting money aside that you are not going to use for 20+ years is a difficult task for anyone, especially if you could make use of it now.

This is something that even financial experts struggle to do (and we should know better).  If you have put off setting up your finances so that you can save for retirement, don't feel too guilty.

You're not alone, around 48% of Americans don't have a retirement bank account.  But don't worry too much, you have made the first step.

You have started looking for help and you have come to the right place.  In the guide, we will talk you through the 7 most important stages of saving for retirement and life after work.

7 Steps to Save for Retirement

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When Can You Retire?

How much money you will need to enjoy your retirement will depend on two factors - (1) when you are planning to retire and (2) what you are planning to do with your retirement. 

We cannot help you with the second part, but we can give you some information about how the retirement system works in this country. 

Here are the most important things that you need to know in order to pick your retirement date: 

  • If you were born before 1934 then you can claim your social security benefits when you turn 66. 
  • If you were born between 1934-1960 you can claim your social security benefits between turning 66 and 66 and 10 months. 
  • If you were born after 1960 then you can claim your social security benefits once you turn 67 
  • If you start claiming your social security benefits later you will earn more. This maxes out at age 70
  • You can retire earlier, but you will not be able to claim your social security benefits until you reach the government-approved age. 

If you are planning to retire early then you are going to want to set aside money in a savings account that is not designed for pensions. This means you will be able to access it before you reach the official retirement age

Some people retire multiple times, this will not affect how much social security you receive, but you may not get the bonus money for retiring late if you retire multiple times. 

When you retire is up to you, but it pays to plan these things out in advance.

The Importance of Saving for Retirement

Did you know that in many countries around the world, employers are required to put money aside for their employees' retirement? This is how important many parts of the world believe saving for retirement to be. 

We often get asked about whether saving for retirement is something that everyone needs to do. Nearly everyone we talk to has an excuse for not putting money aside for retirement. 

So, is this just a case of people being short-sighted, or is it not worth bothering to put aside money for your retirement? 

We think it is short-sightedness. Lots of people aren't willing to plan for the future when they can enjoy themselves now. This is very natural, as humans we are wired to take short-term and immediate rewards over long-term, more valuable rewards.

Psychologists call this the lure of instant gratification.  The easiest way to ignore the temptation of instant gratification is to understand WHY you need to put money aside for your retirement.

This is something we can help you with.  Here are four ways that saving for retirement can benefit you in the long run.

1. Topping up social security checks

Social security benefits are a wonderful thing and we are all very lucky to live in a country that offers it.  However, the average monthly Social Security payout only covers 40% of what a person was earning before retirement.

Experts believe that to live comfortably most people will need to spend 70% of their pre-retirement monthly earnings a month.

This leaves a gap of 30% between what social security can offer you and what you need to live comfortably. Your retirement savings can bridge this gap. 

Saving money to do that can seem like a daunting task, but the earlier you start doing so, the easiest the whole process will be. 

2. Covering medical bills 

As you grow older, your medical bills are more likely to increase than decrease. You want to make sure that you have money set aside so that you don't have to put your social security checks towards your medical bills.

3. Avoid selling your home 

It is not uncommon for people who have not saved for retirement to be forced to downsize or move in with their children so they can have more money.

Putting money aside before you retire can mean that you can enjoy your retirement in a home that you love.

4. Interest compounds over time 

The earlier you put money away for your retirement, the more interest you will earn from your savings. As time goes on this interest will start to earn interest and you will be left with a healthy-sized pot of money for your retirement.

7 Steps to Saving for Retirement

So, you understand that saving for your retirement is crucial but now you want to know the best way to do that. Well, you have come to the right place. 

The following 7 steps will take you through the whole process of saving for retirement in a way that will leave you better off than just keeping your money in a savings account.

1. When to Start Saving for retirement

When should I start saving for my retirement?  Everyone asks this question. Why? People fall into two camps - they either ask this question because they are worried they are too late in life to start or because they are hoping they don't have to worry about saving for another two years. 

Both groups are wrong in their own way. The truth is, no matter your age or what stage of life you are in, the best time to start saving for retirement is now.

The earlier you can start to save for your retirement the better, but it is never too late to start doing so.  When you start saving early, you give yourself enough time to put away a good amount of money that will help you to live the life you want while you are in retirement. 

One of the real benefits of starting to save for retirement early is that you know the money you put in there now will still be in there when you retire, no matter what happens.

We have spoken to multiple people who say that they have worked out how much money they need to retire and that on their current paycheck they wouldn't need to start saving for another 10 years. 

This is a mindset we would recommend you avoid adopting, as none of us can predict the future. There may be another financial crash or pandemic that causes many of us to lose our jobs, or a new industry might create new opportunities for you.

There is no guarantee that you will be working the same job for the same paycheck for the rest of your life.  If you want to prepare for the future properly, you need to prepare for the things that will happen between now and your retirement as well. 

If you are starting to put money aside for your retirement later in life then you may want to consider investing some of your money, rather than just putting it aside in a savings account.

2. Plan how much you need to retire

How much money will I need when I retire?  The majority of savings experts suggest that you will need between 70-90% of your pre-retirement annual income for every year that you are retired.

This will come from a combination of social security benefits and savings you have put aside.  You can start claiming your social security checks between the ages of 66-67 (depending on when you were born), but if you wait until you are 70 before you start claiming these benefits you will get a bigger payout. 

If you want to retire before 67, you will need to use your savings to cover all your expenses until you can claim your social security checks.

So, if you are planning on retiring early then you are going to need to prepare for that.  To so understand how much money you will need to save you will need to decide when you are going to retire and how much money you want to have when you retire.

Then factor in what you will get from your social security checks - this calculator will help you with that.  One of the most difficult things to calculate when looking at retirement funds is how long you expect to be retired, as none of us know how long we are going to live for.

We have always been told that you should put together your retirement fund assuming that you are going to live to 100.  You can reduce the amount of money you will need to spend while in retirement by doing a few things.

You could try to pay off your mortgage before you retire, this will take a lot of the financial pressure off.  The earlier that you retire, the more money you will need to have put aside. 

If you want to retire early, but haven't left a lot of time to start saving, then you might have to be a little bit more creative with your retirement funds - you may want to consider investing.

3. Choose the best retirement route

This step involves you making two choices: (1) choosing how much money you are going to start putting into your retirement funds every month and (2) choosing the type of retirement scheme you want to use.

What savings should you prioritize?

If you are a 20 year old reading this article, you're probably wondering how you are going to save for college, a house, a car, and for retirement all at once.

If you're 30 or over, then we are well aware of how many different things you need to save for at once. How do you choose how much money to put into each saving pot? 

Write down everything you are saving for, how much you will need to save for it (in total) when you plan to spend that money, and how much money you plan to put aside for savings each month. 

You may want to put the most money into the savings goal that will be relevant sooner. Then when you have bought that item, split the money you were spending on it between the other pots. 

The closer you get to retirement, the more you need to prioritize saving for it. But if you are 28, you don't have to put all your savings towards retirement.

How does my job affect how I need to save for retirement?

Not every job offers a retirement plan or even a 401(k). This may be because the employer thinks looking after 401(k) is a waste of resources for them or because they offer a different type of retirement scheme.

If you are lucky, you might be able to choose the type of retirement scheme you get to us, as some employers offer multiple options. 

However, most people won't get a choice and will just have to go with whatever their work has on offer.  There are three different saving routes that your job can take you down - having a 401(k) which is most common, we will be covering that in the next section, having a 403(b), or having an IRA. 

If you work for a For-Profit business then you should skip this last section and move on to Step 4. Most people reading this article will fit into this group. 

If you work for a non-profit organization then you have a few options of saving plans. Your organization may offer 401(k), 403(b), or 457 plans.

  • 401(k) - see the next section (Step 4)
  • 403(b) - instead of putting your money into a mutual fund, as you would with a 401(k), your money is put into an annuity. The bad news for you is that these usually come with high fees. However, annuities are an insurance product and there is little to no risk as long as the insurers don't go bust. 
  • 457 - these are just like 401(k) except they are designed for charities and non-profit employers 

If you are self-employed or you work for a company that doesn't offer retirement plans then your best option is to take out an IRA. We will cover everything you need to know about IRAs in Step 5. 

You may also have the option to set up a Solo 401(k) that you run yourself. 

4. 401(k) plan options

What is a 401(k)?  A 401(k) is the most common form of a retirement plan that employers offer their workers.  401(k) contributions are automatically taken out of the employee's paycheck at the end of each pay period and are invested into funds of their employer's choosing.

The money that is taken out for the 401(k) is not taxed.  Employees are limited in how much money they can contribute to a 401(k) each year, as of 2022 they will be able to add $20,500 (under 50) or $27,000 (over 50) per year.

There is no limit on the number of years someone can add to their 401(k). The amount of money that will be added to the 401(k) each month will depend on how much money you earn and how much your employer requires you to contribute.  

Some employers make contributions to your 401(k) mandatory, while for others it is optional. If your employer does offer this system then we recommend opting into it. 

The 401(k) process is not perfect, but one of the things we really love about the 401(k) system is that once you turn 50, you are allowed to contribute $5000+ more every year.

This allows you to really ramp up your savings as you get close to the retirement age.  Another beneficial part of the 401(k) system is that some employers will match your contribution, out of their own pocket.

Not all employers do this, and it is not required by law.  Other employers choose to pay a lump sum on top of the 401(k) when the employee retires and withdraws their money. 

Over time, these contributions and any contributions from your employer will add up nicely, and you will not have to lift a finger, because all the payments are made automatically. 

The only time you will have to ever do any organization with your 401(k) is if you move jobs. You will have to organize transferring your 401(k) to your new company yourself.

They may not have the same system as your previous employer, so you will have to work with HR to set up a new version of the account. Or move your money into a private IRA so you can continue to see the tax benefits of your previous 401(k) and contributions. 

Changes that are being made to 401(k)s in 2022

  • Under 50's - the annual contribution limit is being raised from $19,500 (in 2021) to $20,500 in 2022
  • Over 50's - the annual contribution limit is being raised from $26,000 (in 2021) to $27,000 in 2022.

5. Contribute to an IRA 

What is an IRA?  IRA's are a great option for everyone - whether you have a 401(k) or not.  If you do not have a 401(k), your IRA will be crucial.

If you do have a 401(k), an IRA can act as an extra tax-protected pot for you to store your money in.  No matter which category you fall into, you can see benefits from opening an IRA. 

Benefits of IRA's

Here are the 8 main benefits of opening an IRA and using it to save for a pension: 

  • You can open one at any age
  • You will save money on your taxes if tax rates go up 
  • Most IRAs don't require minimum distributions (A Traditional I.R.A. is an exception to this) 
  • It is easy to take your money out of the account 
  • You can make contributions for the previous fiscal year up until the tax deadline 
  • You can have a 401(k) and an IRA and reap the benefits from both 
  • Once your turn 60 some IRA will let you distribute money tax-free 
  • You can put money into an IRA whenever you like - you could add your full allowance on the first day of the year, or spread it out 

Types of IRA's

Now that you have decided you want an IRA, it is time to choose the type of account that you want. IRA's are not exclusively made to mimic employer contribution schemes, so they do not offer the exact same benefits as a 401(k). 

However, they are by far the best type of account to put money in for the long term. Here are the four best types of IRA's for pensions: 

Traditional IRA

These IRA's are an investment IRA. You are able to contribute up to $6000 to this IRA per year. The money you contribute is invested and you are not taxed on any of the returns until you withdraw them. 

There are withdrawal limits and windows with Traditional IRA's - if you withdraw early you could be fined up to 10% as well as having the withdrawal taxed as income. 

Simple IRA

Simple IRA's can be used by self-employed individuals or businesses with less than 100 employees. They offer some of the benefits of 401(k) but don't require the business to need a lot of collateral to make the system work. 

With a Simple IRA, your boss or yourself (on behalf of your self-owned business) can contribute  $13,500 per year for those under age 50. This is going up to $14,000 in 2022

Roth IRA 

Roth IRA's are possibly the best option for anyone who knows they can leave their retirement fund alone until they retire. 

When you put money into a Roth IRA you are taxed, however, you are not taxed again when you withdraw the money - like you are with other types of IRA's. 

There are early withdrawal fees, but if you can wait until you retire, you will be rewarded. 

Self-Directed IRA

Self-Directed IRA's can either be Traditional IRA's or Roth IRA's - however, they allow you to have a choice of what is done with your money, as well as having an account custodian provided by the bank.

6. Consider avenues to invest your money

Should I invest any of my retirement funds?  The answer to that question is yes!  But you should only invest in a way that makes you feel comfortable.

There is always a risk when it comes to investing, but some investments are riskier than others. However, the bigger the risk, the bigger the reward (usually). 

Most retirement planners advise that you should invest fairly aggressively when you are young, and draw things back as you get closer to retirement. 

If you are planning to invest some of your retirement money then you can choose to bring on an investment manager or do it yourself. 

An investment manager will cost money, but they will be able to make more informed choices about where to invest their money. The money you spend on their salary, you are more than likely to make back thanks to their investments. 

However, if you are on a budget or are just starting out then you might want to consider building your investment portfolio yourself. 

There are many different ways to invest, however, we would recommend looking into the following three: 

  1. Getting an investment IRA. 
  2. Invest in stocks
  3. Invest in Cryptocurrency

7. Check in on your retirement accounts annually

Okay, I have done all of that, what's next?  If you have completed the first 6 steps on this list then congratulations, you are well on your way to having an enjoyable and comfortable retirement. 

But, what's next, you may be asking. Well, all you have to do now is review your accounts and make small adjustments to what you are paying in each month or year. 

Let us explain.  You could leave everything as it is now, set up so it suits the goals for retirement that you have today. Or, every year, you could review your retirement accounts and your goals, then decide if you can afford to carry on putting that much money in and whether you want to start paying more or less into the accounts. 

Your financial goals and situations will change between now and when you retire, so it is important that you are constantly adjusting your payments to match where you want to be when you retire.

A quick guide to an annual pension review:

A quick guide to an annual pension review:

  1. Make a note of how much money is in each account. Is that the amount you were expecting? If not, is it more or less? And why is that number different?
  2. How much money would you like to retire with? If you continue saving the way you have done in the previous year, will you reach that goal?
  3. What can you do to make sure that you are reaching your goals? With your current spending and saving habits, plans, and budgets can you afford to reach your goals? Do you want to start investing any money?
  4. Implement any changes that need to be made, including adjusting any monthly payments you have set up, or moving your savings to an account with better interest rates.
  5. If you plan to start investing in the next year, talk to a financial advisor and explore our website for more details on how to do that.  

Summary

Nearly half of Americans have no money put aside for their retirement despite the fact that it is one of the most important investments that you can make.

You are investing in your own future.  There are many people who are put off by the idea of saving for retirement because they think it is complicated.

We hope that this article has changed your mind about that.  There are many simple things that you can do to improve your future financial situation. Now that you have finished this guide, what are you waiting for?

It is time to start saving for your retirement! 

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