Already dreaming about that long, luxurious retirement you deserve after a lifetime of hard work? Well, if you’re like most Americans, you unfortunately may have some work to do to set yourself up for success. Studies show that almost a quarter of Americans have absolutely nothing saved for their golden years, and another 10% have less than $5,000.
Maybe you’re doing a bit better than those scary statistics and already have a nice cushion sitting in your 401(k) or IRA. Even so, saving for retirement is absolutely critical, no matter how old you are or where you are in your career. And considering that folks need about $1,000,000 saved up on average, you’ve got your work cut out for you.
Fortunately, there are some simple steps to implement today that can help ensure you grow the nest egg you need. Here’s our basic guide on how to save for retirement.
1. Keep your debt to income ratio low
If there’s one surefire way to make saving for retirement way harder than it needs to be, it’s drowning in debt. Trying to keep up with a variety of payments each month will leave you little discretionary cash to funnel toward your nest egg, particularly if those loans and credit cards have high interest rates.
We recommend keeping your total debt to income ratio at or below 20%. That means that the sum of all your monthly payments — including your mortgage, car payment, student loans, and credit cards with revolving balances — should be less than 20% of your gross income. Ideally, you’ll pay off your credit cards in full each and every month… but if you’re not quite there yet, you still need to be putting some of your money toward your retirement fund.
2. Save aggressively
Okay… “some of your money” is maybe a little euphemistic. We actually recommend most of our clients put 20% or more of their gross income toward retirement, especially if their accounts are underfunded or they’re on the later end of their career cycle.
This sounds like a lot, yes… but if you save first, it’ll force the rest of your finances to conform. You’ll also learn to live on less in the meantime, which means retiring comfortably on less down the line.
3. Use the right retirement vehicle
Saving aggressively is great. But if you really want to maximize your returns, you need to use the right retirement vehicle. And while many of us just default to our company-sponsored 401(k)s, there may be a better option available to you depending on your circumstances.
For instance, if you’re just starting out and earning in a lower income bracket, a Roth 401(k) or IRA may make more sense, since you’ll pay lower taxes today than you’re liable to down the line. On the other hand, if you’re a high earner, a deferred account can help you save big money on your tax burden today.
Finally, don’t feel like you’re limited by the contribution maximums of your 401(k) or 403(b). Although they’re often considered to be entrepreneur-only territory, both Roth and traditional IRAs are available to almost everyone, so long as your earnings are below the IRS income thresholds.
4. Invest aggressively
While stashing money in a savings account, or even under your mattress, is better than nothing… it’s not better by much. Cash that isn’t earning interest likely won’t even outpace inflation, let alone the exponential growth potential offered by the stock market.
So we suggest you invest each and every cent of your retirement savings — while still maintaining a liquid account for your emergency cushion, of course. Although nobody can predict the future, the market has seen an average annual growth of about 10% annually over the past decade… and yes, that includes the Great Depression and 2008’s catastrophe. So we feel pretty confident about this recommendation!
Looking for even more information on saving for retirement — and customized advice for your personal financial landscape? Although it may seem like a big project to build up a significant nest egg, with the right tools and tactics, it’s totally possible. And we’re here to help!
We’re always standing by to ensure you enjoy the everyday affluence you work so hard for. Feel free to reach out and book a one-on-one appointment or free introductory meeting today!