How to save money for retirement? Many people are out of words when I ask this question. Why? Because they think it is a far horizon, no one can predict the future and know what will happen tomorrow. Moreover, they also live paycheck-to-paycheck today; their income is not covering their living expenses. So, where is the money to save? That’s a common struggle. If you are one of them, do not ignore this article, Hanfincal will show you that saving has never been so easy. Come with us right now.
1. How to save money for retirement?
Step 1: A goal for retirement savings
A goal has the greatest strength, and you should set it before every step of your life. The more specific your goal has, the more successful you will be. Saving for retirement is not something that can happen overnight. You must set a goal and strictly adhere to it; thereby, success will chase after you. In other words, your retirement dreams are not far from you if you have a long-run schedule for savings from now on.
Are you ready to sketch your happily ever after? Spend some time with your spouse or a close friend thinking about what you want to do in retirement. Are you relaxing on a beach somewhere, sipping tequila? Do you spend time with your children and grandchildren? When you can see your retirement goals in high-definition, you’ll be more focused and willing to go the extra mile. After all of your creative thinking, a retirement goal will be shaped.
Step 2: Invest 15% of your income into tax-advantaged accounts
Aiming to save 15% of your income for retirement is a good starting point. We don’t know how much you make per month, but you should set aside 15% of it for savings. Don’t forget about it.
Here’s how you can begin saving for retirement:
- Take advantage of the 401(k) match. A 401(k) plan is a savings plan for retirement offered by many American employers that offers the saver with tax benefits. If your company provides a traditional 401(k) match on contributions, ensure you invest at least up to the match to take full advantage of the free money.
- Create a Roth IRA. If you already have one traditional 401(k) and have invested up to the match, talk to your advisor about opening a Roth IRA. It’s a type of retirement savings account that allows you to defer paying taxes on the money you put into it upfront. This means that the growth in your Roth IRA, and any withdrawals you make after the age of 59 1/2, are tax-free.
- Return to your 401(k). If you maxed out the Roth IRA contributions for the year and still haven’t reached 15%, increase your 401(k) contributions until you do.
Your investments in your 401(k) and IRA should be evenly distributed among four types of growth stock mutual funds: growth and income, aggressive growth, growth, and international.
Step 3: Going beyond 15% – max out your 401(k) and other investing options
If you have already saved 15% of your income for retirement, don’t forget to keep more and spread your comfort zone. Now that you have nothing standing in your way of amassing massive wealth, it’s time to start racking up the points and kicking your retirement savings into high gear!
When you’re ready to invest more than 15% of your income toward retirement, consider the following options:
- You should first max out your 401(k) and Roth IRA when you have extra cash to invest.
- Establish a taxable investment account. To avoid an early withdrawal penalty from your 401(k) or IRA before the age of 59 1/2, open a taxable investment account. You can put as much money into the account and withdraw it whenever you want, but you have to pay taxes on any money your account earns.
- Make a real estate investment. Buying a rental property can be an excellent way to generate passive income.
- Make the most of your HSA. A savings account allows you to save money before taxes for qualified medical expenses. Once you reach the age of 65, your HSA functions similarly to a traditional IRA, allowing you to withdraw funds for any purpose. But, just like a traditional IRA, you’ll have to pay taxes on it when you withdraw it.
2. 22 Ways to save more money for retirement
2.1. Automate saving
Contributions to your 401(k) are typically deducted automatically from your paycheck, so you don’t have to do anything to save a portion of your earnings each pay period. Keeping in this manner prevents you from interfering with the saving process, ensuring that your monthly savings run smoothly.
2.2. Avoid penalties
If you withdraw money from your retirement accounts before the age of 59 1/2, you may be subject to early withdrawal penalties. Fees may also apply if you frequently trade funds. To avoid another penalty, start withdrawing from retirement accounts after 72.
2.3. Brokerage accounts
You can invest in various instruments if you have a funded brokerage account (a non-retirement account).
- Investing in mutual funds
- Deposit certificates (CDs)
- ETFs (exchange-traded funds) (ETFs)
- Real estate investment trusts (REITs) (REITs)
- Money market mutual funds
2.4. Cash-balance plans
Like defined benefit plans, cash-balance plans are a type of pension plan. However, rather than replacing a certain percentage of your income for life, you are promised a certain hypothetical account balance based on contribution and investment credits (e.g., annual interest). A standard setup for cash-balance plans is a 6% company contribution credit and 5% yearly investment credit. Your benefit will be affected by the date you retire, and working longer is more advantageous.
2.5. Cash-value life insurance plan
Some businesses provide insurance vehicles as a perk. There are four kinds of them: whole lives, variable lives, universal lives, and variable universal lives. They provide a death benefit while also accumulating cash value, which can supplement your retirement needs. When you withdraw the cash value, the premiums you paid are deducted first and are not taxed.
It mitigates multiple risks by providing either a death benefit or an income stream. In addition, you will benefit from tax deferral on the growth of your investment. If you’ve reached your 401(k) and IRA contribution limits, you might want to consider investing in this type of life insurance.
2.6. Claim tax breaks
Without the impediment of taxes, your money will grow faster. You can postpone paying income taxes with a traditional 401(k) or IRA, or you can prepay taxes with a Roth 401(k) or Roth IRA. You can better control your taxes if you set up a Roth before retiring. Low- and moderate-income savers may also be eligible for the saver’s credit.
2.7. Contribute your tax refund
The tax refund is one of the clever ways the government contributes to your retirement savings plan. Using IRS (Internal Revenue Service) Form 8888, you can deposit your tax refund into a traditional or Roth IRA. You have the option of applying your IRA contribution to your current tax return or the following tax year.
2.8. Cut unnecessary expenses
In reality, you are wasting your money in a variety of ways. A phone’s unlimited data plan, a gym membership you don’t use, or an expensive cable TV package you don’t have time to watch are all examples of easy-to-cut costs. Reduce an unnecessary or redundant service and put the savings into a retirement account.
2.9. Defined contribution plans
Since the 1980s, defined contribution (DC) plans have effectively dominated the retirement market, including 401(k)s. According to recent research by insurance broker Willis Towers Watson, roughly 86% of Fortune 500 companies offered only DC plans rather than traditional pensions in 2019.
- The most common DC plan among employers of all sizes is the 401(k).
- In contrast, the similarly structured 403(b) plan is available to public schools and specific tax-exempt organizations.
- The 457(b) plan is most commonly open to state and local governments.
Many DC plans offer a Roth version, such as the Roth 401(k), in which you contribute post-tax dollars but can withdraw the money tax-free at retirement.
2.10. Guaranteed income annuities (GIAs)
Employers typically do not offer GIAs, but individuals can buy these annuities to create their own pensions. At retirement, you can exchange a large lump sum for an immediate annuity and then receive a payment every month for the rest of your life. You’ll get bond-like returns in exchange for the guaranteed income, but you’ll forego the possibility of higher returns in the stock market.
2.11. Invest in a small business
If you have a tight amount of money and are tired of saving, why not find another way to spread your money out more? Investing in a small business is the best option right now to help you reach your retirement goals. A small business investment does not always imply becoming a business owner. If it feels like an oversize shirt to you, you can invest as a silent partner in a well-established company.
2.12. IRA (Individual Retirement Account) plans
IRAs are tax-advantaged accounts in which you can invest your money. Traditional IRAs, Roth IRAs, spousal IRAs, rollover IRAs, SEP IRAs, and SIMPLE IRAs are various IRAs.
- Traditional IRA: The most significant advantage is that you won’t have to pay any taxes on the saving money until you withdraw it in your retirement. It also allows you to buy an almost limitless number of investments, including stocks, bonds, CDs, real estate, and others.
- Roth IRA: This is a newer version of a traditional IRA that offers significant tax advantages. The Roth IRA has several benefits, including the ability to avoid paying taxes on all money withdrawn at 59 1/2 or later.
- Spousal IRA: A spousal IRA allows you to manage your spouse’s retirement planning without requiring your partner to work. Moreover, they can take advantage of the various benefits of an IRA, whether traditional or Roth.
- Rollover IRA: It is formed when a retirement account, such as a 401(k) or IRA, is transferred to a new one or when a traditional IRA or 401(k) is converted to a Roth IRA. It allows you to continue to benefit from attractive tax benefits.
- SEP IRA: It is a type of IRA set up for small business owners and employees. This is a free retirement account for employees. The higher contribution limits make them far more appealing to self-employed individuals than a traditional IRA.
- SIMPLE IRA: This avoids the requirement of passing several non-discrimination tests each year because all employees receive the same benefits. They allow employees to make pre-tax salary deferrals and receive a matching contribution.
2.13. Nonqualified deferred compensation plans (NQDC)
NQDC is only available to top executives in the C-suite (the executive-level managers within a company). There are two major kinds: Salary deferrals for a company, and the employer solely funds the other. The advantage is that you can save money tax-free, but the employer cannot deduct its contribution until you begin paying income tax on withdrawals.
2.14. Pay lower fees
Don’t pay more than is necessary to invest. Use your annual 401(k) fee disclosure statement to find low-cost funds in your 401(k) plan, or look for low-cost index funds for your IRA.
2.15. Real estate investments
You should invest in a fund in global real estate investment trusts (REITs). They are incredibly affordable, transparent, and liquid. Gaining access to REITs through a mutual fund allows investors to diversify global real estate at a low cost.
Aside from REITs, you can buy real estate outright to generate a stream of income during your retirement years. You also can decide to continue renting out the property and earn a consistent income from rents.
2.16. Reallocate windfalls
If you receive an inheritance, bonus, prize money, lottery, or other cash windfalls, resist the urge to spend it right away. Make a habit of setting aside a portion of every influx of cash for retirement. You can avoid some tax consequences of receiving additional income if you put it into a 401(k) or IRA.
2.17. Redirect your raise
Increasing your earnings is also a way to increase your savings. Raises provide an opportunity to grow your retirement savings without reducing your take-home pay. When you get a raise, put a part of it into a retirement account.
2.18. Save 1% more
Practice makes perfect. After 35 years, if you earn $50,000 per year, save 1% more ($42 per month), and earn 6% annual returns, you will have an extra $57,517. Over time, a slight increase in savings can result in a significant increase in your retirement nest egg.
2.19. Solo 401(k) plan
The Solo 401(k) plan is intended for the owner of a small business and their spouse. Because the business owner is both the employer and the employee, companies can make elective deferrals of up to $19,500, plus a non-elective contribution of up to 25% of compensation, for a total annual contribution of $57,000, excluding catch-up contributions.
2.20. Tax-deferred annuities
Annuities, available through insurance companies, offer tax deferral and various investment options. Annuities can be purchased with any of the following:
- A fixed interest rate.
- An indexed interest rate: the performance of a specific index determined.
- A variable rate that is based on the performance of the underlying investments.
2.21. The federal thrift savings plan (TSP)
It is available to government employees and members of the armed forces. Participants can choose from five low-cost investment options:
- A bond fund
- A small-cap fund
- An S&P 500 index fund
- An international stock fund,
- A fund that invests in specially issued Treasury securities.
Federal employees are eligible for a 5% employer contribution to the TSP.
2.22. Traditional pensions
Traditional pensions are one type of defined benefit (DB) plan, and they are one of the simplest to manage because they require so little of you as an employee. This benefit addresses the risk of running out of money before you die or longevity risk.
How to save money for retirement? Hanfincalhopes that it is no longer challenging to answer. Keeping today is a perfect step for saving your future. Follow three easy steps above; success is chasing after you soon.
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