Most Americans’ top financial goal is to have enough money for retirement. But this goal is more of a wish than a plan for many people. The Centre for Retirement Research at Boston College says that about half of the people who leave at age 65 won’t be able to keep living the way they did before they retired.
1. Put away 15% per year.
The old rule of thumb was to save 10% of your household income each year and have enough money for a stable retirement. But some experts say that should be raised to 15%.
Workers have to put more money into their accounts because of several things, such as longer life spans, the possibility of lower investment returns in the future, and the end of pensions.
2.More than 15% off!
That 15% rule is based on two critical assumptions: you start saving when you’re 30 and plan to retire in your mid-60s.
But if you started late, you might need to save more. For example, a worker who is 40 years old and hasn’t saved anything for retirement should try to put away 25% of their family income.
Then there’s the age you want to retire at. Many want to get out of the rat race well before turning 60. Consider people who follow the FIRE (financial independence/retire early) trend. They save 40%, 50%, or more of their income to bed as soon as possible.
3. Save money on the most expensive things.
One way to have a safe retirement is to cut back on what you spend now so you can pay for what you spend in the future.
You’ve probably heard financial experts say that if you gave up your daily latte, you could be a millionaire. Even though every little bit adds up over time, your financial future is probably more likely to depend on how much you spend on the three most significant parts of the average American budget:
Housing: The Department of Labour says that a third of the budget goes to housing costs. You can save hundreds of dollars each month if you only buy or rent as much space as you need and do so in a less expensive area.
Kelley Blue Book says a new car costs almost $40,000, which is a lot of money. People are taking out bigger, longer-term loans to pay for these cars, and many of them still owe money when they replace them. The best way to decrease these costs is to buy small to medium-sized vehicles that use trim petrol and keep them for 10 to 15 years. Consumer Reports says getting a car to 200,000 miles saves about $30,000.
Food: The U.S. Department of Agriculture says that 30% of the food Americans buy goes to waste. Since the average family spends 13% of its budget on food, almost 4% of its annual income goes to destruction.
4. Get the most out of your retirement savings.
You’re not the only one who wants you to quit your job at some point. Uncle Sam wants to help, and so might your boss.
Accounts with special tax breaks are one way Uncle Sam can help. An IRA is one of these accounts; anyone with a paycheck can start one.
The other accounts are provided by your company (or you, if you work for yourself). 401(k), 403(b), and the Thrift Savings Plan (TSP) are examples. Also, your company might make the deal better by matching what you put into your account.
What tax benefits do these accounts have? Depending on the kind:
Traditional IRA, 401(k), 403(b), and TSP: Contributions could lower your taxable income, which could lower your tax bill in the year of the donation. Also, you won’t have to pay taxes on the interest, dividends, or capital gains your account stocks earn each year. But money taken out of the account is taxed as regular pay.
Roth IRA, 401k, 403b, and TSP: Contributions don’t get you any tax breaks, but gains on investments and withdrawals don’t have to be taxed as long as you follow the rules.
If you save for retirement in a regular bank or stock account, these tax breaks can add tens of thousands of dollars to what you have.
5. Put money away now for the long term.
You can ensure your portfolio does well if you choose stocks with good long-term returns. According to Ibbotson Associates, here are the average annualized gains from 1926 to 2019 for the most common types of investments:
Stores with significant market values, like those in the S&P 500: Average annualized gains of 10.2%
Average annualized growth on government bonds: 5.5%
Average annualized earnings on Treasury bills, which are cash, are 3.3%
Stocks are the best investments at The Motley Fool because they give back more money than other investments. You can get them by buying an S&P 500 or total stock market index fund, which makes you an actual part owner of hundreds of the biggest companies in the world with just one purchase.
Still, the stock market is unstable and hard to predict. You can expect it to drop by at least 20% every few years and at least 40% every ten years. So, if you want to keep your money safe, keep it in cash or stocks, especially if you need it in the next three to five years. Do you have the right mix? Consider a target retirement fund, which gives you a good mix of assets based on when you plan to retire and gets more conservative as the date gets closer.
6. Use the “catch up” option for payments.
If you have yet to plan for retirement, your mid-50s are a great time to catch up by putting more money into your savings. Uncle Sam agrees, which is why people 50 and older can put more money into their retirement accounts.
It’s also essential to learn about programs that will have a significant effect on your retirement, such as:
You can start getting payments from Social Security as early as age 62, but the earlier you file, the smaller your monthly cheque will be. What does it cost to wait? The amount paid goes up by 6% to 8% every year until age 70. Studies show that most Americans should wait until 70 to get Social Security, but most don’t.
A salary with a set benefit: If you are one of the lucky few who will get a cheque from your old job every month for the rest of your life, take the time to learn how it works and your choices. Does leaving later give you more money? Can you take the money as a lump sum instead? Is the pension fully paid for, or is there a chance that payouts in the future will be cut?
Medicare (Medicare): On average, 70% of the cost of health insurance is paid for by companies. But you’re on your own once you quit your job. Medicare, the health insurance program for people over 65, starts when you turn 65. Before you leave, you should know what Medicare covers and if you need extra insurance.
