“How do I start saving for retirement?”
“How much do I need to save for retirement?”
“Is it too late for me to save for retirement?”
I hear these questions all the time. And if you're reading this article, I'm guessing that those are questions you have too.
The good news is, saving for retirement is easier than you think. Today, I'm going to walk you through how to save for retirement in seven steps.
Step 1: Follow our Wealth-Building Roadmap
The first thing you need before you start saving for retirement to do is make sure you're in the right place in our wealth-building roadmap.
Before you even start saving for retirement, make sure you're spending less than you make each month, then pay off any debt with an interest rate over 7%. After that, you want to build up an emergency fund.
Once you have those three things in place, you're ready to start saving for retirement.
Step 2: Find Your Monthly Savings Number
“How much do I need to save for retirement” is the #1 question that people have when it comes to how to save for retirement.
The truth is, there is no magic, one-size-fits-all answer. It depends on a number of variables, such as when you want to retire, where you want to live, and what lifestyle you want to have.
For example, are you trying to retire at 40 or at 70? Do you want to live in a condo or a big house your family can visit? Do you want to take your grandkids on trips?
As a rule of thumb, if you're in your twenties, save 15% of your pre-tax income each month. If you're starting in your thirties, you want to save 20% of your pre-tax income. If you're just starting to save for retirement in your forties or your fifties, you'll need to save even more because your money has less time to grow.
If you want to know the exact amount you'll need, I have an easy, stress-free way to figure out exactly how much you need to save. Just use an online retirement calculator.
You'll add in your current savings and anything you expect to get from social security, and then you'll adjust the savings amount to see exactly how much you need to save each month to meet your retirement goals.
Once you enter the numbers, your calculator will spit out exactly what you need. Congrats — you have your monthly goal!
Step 3: Open a Retirement Account
If you don't already have a retirement account, let's take a minute to look at your options.
Especially if your employer offers matching, you'll want to open a 401(k) or 403(b), which are both employer-sponsored accounts. In addition, you can open a Roth or traditional IRA (Individual Retirement Account). If you're self-employed, you can open a SEP IRA.
So, if you haven't already, open up a retirement account and start transferring your savings!
Step 4: Take Advantage of Free Money (aka 401(k) Matching)
What is 401(k) matching? It's when you save money for your retirement and your company contributes the same amount that you save. They'll often match up to a certain amount or a certain percentage of your salary.
So, if your employer offers 401(k) matching, you definitely want to advantage of that. It's basically free money. And make sure you're contributing the maximum amount that they're willing to match.
For instance, if your company matches 4% of your salary and you make $5,000 per month, you could contribute $200 per month towards your retirement, and your company would contribute an additional $200 per month, meaning you get an extra $200 for free. (Ka-CHING!)
Step 5: Max Out Your Contributions
The next step in our “how to save for retirement” guide is to max out your contributions. By that, I mean that if your employer doesn't offer matching — or if you've already maxed that out — is max out your contribution to your Roth or traditional IRA.
Each year, the IRS limits the amount that you're allowed to contribute. In 2021, the amount is $6,000. But if you're over 50, you can contribute up to $7,000.
Try to contribute the maximum amount to those accounts each year. Max out your 401(k) to where your company matches and max out your Roth, traditional or SEP IRA.
If you're a great saver and you're saving more than those amounts allow, you can open your own brokerage account, which isn't technically a retirement account, but can mentally save everything in it for retirement.
Step 6: Invest Your Retirement Savings
Once you've started saving your money in the appropriate accounts, you're going to invest it.
The easiest and simplest way to start investing is with target date funds. These are pre-made portfolios that allocate your money to a mix of stocks and bonds that are selected based on your age.
If you want to invest yourself, or if you're picking a fund that your employer offers, then you can use this handy-dandy rule of thumb. Generally, you want your portfolio to be invested in the percentage of stocks that is equal to 120 minus your age.
Case in point: if you're 20 or younger, you want to have 100% of your portfolio in stocks. If you're 30, you want 90% in stocks.
(Quick note — target date funds will automatically change the allocation of stocks and bonds changes over time as you get older.)
Step 7: Contribute to Your Retirement Savings Every Month — NOW
The first rule of investing is to get started as soon as you can. The longer your money is invested, the more it will grow. If you wait until you're older to start investing money for retirement, then you'll have to save more money because it will have less time to grow.
So, even if you're young and retirement seems like a long ways away, don't wait to get started! On the other hand, if you're older, that's ok, but it does mean that starting as soon as possible is even more important.
And keep in mind that you don't need to take all your money out of your retirement account the year you retire. You can leave it invested while you're in retirement and just take out what you need when you need it, which means you have extra time for your money to grow.
Hopefully that gives you some peace of mind if you're getting started later in the game.
I hope this has helped you figure out how to save for retirement. If you want to learn more about how to build your wealth and invest your retirement savings, then definitely check out our webinar, Think Like an Investor.
Hope to see ya there!