How much do you need to save for retirement?
Well, it depends.
Fidelity suggests you save 10x your annual salary by the age of 67. However, others believe you’ll need $1 million or more.
Those numbers can feel a little daunting at first. Yes, $1 million is a lot of money! Still, saving that much money is achievable if you put a few smaller, savings goals in place.
But how do you do this? Stick with us and we’ll show you five practical tips to help you boost your retirement savings — and reach your goals.
Tip 1: Start Saving Early
Start now. You’ve probably heard this before, but it’s one of your biggest assets when trying to hit your retirement goals.
Here’s why. When you start early, you give your money more time to grow and compound, which results in a higher nest egg at retirement.
But what do we mean by compound? Compound interest is when you earn money on both the money you save for retirement and the interest you earn on that money.
Here’s an example.
Say you have $1,000 invested and earn 5% annual interest. At the end of the year, you have $1,050 — that extra $50 is earned interest. The next year, you earn 5% interest on $1,050, which means you’ve earned interest on the interest you earned the previous year.
This is how compound interest works. The interest you earn is continually being reinvested so you can earn interest on that interest.
Let’s look at how this would play out for person A (Alicia) who started investing 10 years earlier than person B (Jordan).
Alicia starts saving for retirement at 23 and puts $500 per month away for 40 years. By the end of 40 years, she will have saved 240,000. Assuming an average annual return of 7%, her savings will have grown to approximately $1,180,000.
Jordan waits until he is 33 to start investing and puts away $1,000 per month for 30 years. At the end of 30 years, he will have saved $360,000. With the same average annual return of 7%, his retirement savings would have grown to approximately $960,000.
Even though Jordan contributed more money while saving for retirement, Alicia still accumulated more due to the power of compound interest and a longer time horizon.
Tip 2: Take Advantage of Employer Contributions (free money)
Does your employer offer a retirement match? If you’re not sure, you need to ask.
Why? Because it’s essentially free money.
Here’s how it works: when an employer offers a retirement plan, they may choose to match a percentage of the employee’s contributions. So, for every dollar that the employee contributes, the employer also contributes a certain amount, up to a certain limit. Any extra money the employer contributes, beyond what the employee contributes, is free money!
Let’s look at an example.
Let’s say a church offers a 403(b)(9) plan with a 5% match. If an employee earns $60,000 per year and contributes 10% of their salary to their plan, or $6,000 per year, the employer will match 5% of their salary — coming out to $3,000 per year.
So, the employee’s total contribution to the plan would be $9,000 per year ($6,000 from the employee and $3,000 from the employer).
Over time, every bit of “free money” that goes towards your retirement plan adds up significantly and boosts your savings.
Tip 3: Create a budget and automate your contributions
Can you put more toward your retirement savings?
To answer this question, you’ll need to first create a budget. This way, you’ll know exactly what comes in, what goes out, and how much you have left over to put toward savings.
A good rule of thumb is to put away 10-15% of your income for retirement. If you can do this, great! If not, don’t worry. You can work your way up to this.
For a more thorough overview of budgeting for retirement, read Estimate How Much You’ll Need to Save for Retirement.
Once you know how much you want to contribute to your plan, set up automatic contributions. This removes the stress of remembering to manually make contributions each month.
Then, monitor it so you can stay on track and meet your goals.
Tip 4: Delay Social Security
When you approach retirement, you have an important decision to make: take social security at age 62…or wait until you’ve reached full retirement age.
If you can, it’s best to wait. If you start taking your benefits before you reach full retirement age, (which is between 66 and 67 depending on your birth year) your benefits will be reduced by 5% to 7% each year to account for the longer period of time you will be receiving payments.
On the other hand, if you wait, it can lead to increased benefits. The Social Security Administration offers delayed retirement credits to individuals who wait past their full retirement age to start receiving benefits. The credits can increase monthly payments by as much as 8% per year.
Of course, not everyone is able to wait until full retirement age to take full benefits. If you need help deciding when you should take social security, talk to a financial advisor.
Tip 5: Take advantage of catch-up contributions
If you’re behind on retirement savings, you’re not alone. Ramsey’s State of Personal Finance Study says 42% of Americans are not saving for retirement, and for those who are, 56% are behind on their goals.
This may seem dismal. However, there’s still hope. If you’re over 50 and are behind on your savings goals, you have a chance to catch up. This is good news!
They’re called catch-up contributions.
With catch-up contributions, those who are 50 or older can add to their regular contribution limit — and yes, boost their retirement savings. How much extra can you contribute? Check out what the IRS has to say here.
A final word
Here’s the takeaway: no matter where you are in life, there’s likely something you can do that can boost your retirement savings. However, the sooner you get started, the better.
If you’re feeling uncertain about your next savings move, reach out to us at TruthPoint Financial. We’re a team of friendly, dedicated professionals who genuinely care about you and your future. Give us a call or schedule a meeting today.
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