Editor’s Note: This article is part 1 in a 3-part series about saving for retirement. We hope you find it useful; be on the lookout for upcoming articles in May and June!
Retirement: It’s Not That Scary!
Does retirement feel like a hazy future concept that you might not even get to, even if you work really hard? For most Americans, this seems to be the case. A survey of consumer finances obtained from the Federal Reserve reported in 2022 that just 46% of households have any savings at all set aside for retirement. Older individuals tend to have more savings. The same survey showed that about 63% of people aged 50-54 have a retirement savings fund.
However, with an average retirement age in the U.S. of 64 (and it’s lower than that in a lot of states!), that doesn’t leave much time to shore up your future. Starting early, even if that means starting small, can provide financial security and peace of mind once you reach retirement age. You’ve worked your whole life, so it’s important to make sure you can reap the rewards once it’s time to step away!
Looking for financial guidance as you start your retirement savings process? Book a call with the team at First Light Financial LLC here.
Start Saving for Retirement
As So-Fi points out, it’s crucial to start saving right away since compounding returns mean that the longer you invest, the more money you’ll make passively as you accrue interest. Take out your calculator and do some math: if you invest $5 in a fund with a 6% annual return rate and then withdraw your money after 5 years, you’ll have earned $1.69 in interest. If you take your money out after 25 years instead, you may expect to have earned $8.45: 5 times the 5-year amount.
…However, that’s not how compound interest works. Because it compounds annually, you’ll have earned $16.46 interest, which is over double the amount if you had earned interest linearly. $5 is a small amount for the purpose of this example, but multiply that by much larger savings, and you can see how compound interest can really benefit you over time!
Setting Goals for Retirement
Planning for retirement can seem overwhelming, but as with any pursuit it’ll feel a lot more doable once you set a goal (and write it down!) and start meeting that goal consistently. Ramsey Solutions, the personal finance company founded by Dave Ramsey, recommends that if you’re 40 years old with an annual salary of $55,000 with nothing set aside for retirement, start by dedicating 15% of your gross income to retirement savings. That factors out to about $688 each month. If you follow that plan consistently for 25 years, you could end up with over $1 million in savings. It’s a great example of how things add up quickly!
Don’t forget to keep in mind the total amount you’ll need in retirement. Capital One suggests shooting to have 70-90% of your pre-retirement income on hand each year so that you can maintain your current lifestyle after you stop working.
Of course, if you can’t afford 15%, set a smaller, more reasonable goal. The idea here is to make a plan that fits your lifestyle and your finances.
If you need help deciding how much you should be saving, a First Light Financial LLC financial advisor is here to help! Click here to get started.
How to Consistently Save
This likely goes without saying, but being consistent is the biggest thing you can do to start saving for retirement right now. Put money in accounts every single month, and watch your investments grow! Even if you can’t afford to commit the same amount month-over-month, adding some money is always better than none. It’s all about getting in the right headspace to save and forming a habit that will follow you long-term.
Investing for Retirement
There is no shortage of options for where to put your money when saving for retirement. Your first instinct might be to sock your money in a bank account and forget about it. While that will earn you interest, it might not be the highest-yield option available, and it might be tempting to dip into it for non-retirement purposes. Employer-sponsored plans such as a 401(k) typically have higher contribution limits, and you can’t take out money until you’re 59 years and 6 months old without incurring taxes and a 10% penalty – which incentivizes you to set it and forget it! If you work for a school or a tax-exempt organization such as a nonprofit, a 403(b) plan is also an option.
Mutual funds can be a much more fruitful investment than just buying individual stocks, without doing much research; they are also managed by the company to prioritize growth and stability over time so you don’t need to get granular with picking out stocks that may or may not perform long-term.
Finally, a traditional or Roth IRA might be right for you if you do want a more flexible option that isn’t employer-sponsored: you can withdraw your funds early without penalty, there is no required minimum distribution so you don’t have a “tax bomb” waiting for you as The Balance puts it, there are options for spousal contributions, and you can contribute to both a regular IRA and a Roth at the same time.
Of course, setting up recurring deposits is ideal since money will be withdrawn automatically from your paycheck and sent directly to your investment accounts of choice.
If you’re a fan of day trading or buying real estate, you can use these more self-guided investments as retirement savings as well. Just make sure not to put all your eggs in one basket, and take low-risk high potential investments as much as possible.
If you’d like to learn more about all the investment account options we covered here, or just how to boost your personal portfolio, an expert at First Light Financial LLC can break it down for you!
Increase Your Savings Over Time
If you venture into the world of retirement saving by putting away 15% of your income, or even if you start with much less, you can consider increasing that amount over time. Inflation means that your dollar won’t stretch as far as the years go on, but as Forbes points out here, that doesn’t mean that inflation of your lifestyle needs to increase along with it. Most people see an upward salary trajectory over the course of their professional careers, and most people also increase their spending commensurately (or at a rate far outpacing their income growth). However, if you can still live within your means even while making more money than you were before, you can sock that extra cash away for retirement. A good rule of thumb is to increase your savings by 1% of your income each year until you hit that solid 15% number. After that, you can consider increasing your contributions even further each year to accelerate savings. Once you have a recurring amount set aside for retirement, you’ve earned yourself greater financial flexibility in the current day as well, since your all-important future planning is already sorted out.
Pay Down Debt First
If you’re in debt, prioritize paying that off first so that you can more easily save for retirement. The longer you hold debt, especially the more debt you have, the more money you are throwing away to exorbitant interest rates from lenders. First Light Financial LLC can help you get on track and pay down your debt fast. Once you get out of debt, you will find you have a lot more income than you thought – and some of that can go toward saving, including for retirement!
Paying off your home can also mean having a lot of extra money on hand that can go into retirement. According to Ramsey Solutions, the average millionaire takes about 10.2 years to pay off their home. Owning your home outright means you no longer have the biggest monthly expense that most people incur.
As Forbes points out here, increased property tax and maintenance costs are still passed on if you rent your home or owe money on it, but rising real estate prices due to inflation actually work in your favor if you own your home outright! Liquidity in your home without owing money to a bank can mean a big profit margin should you ever choose to sell.
Look for Savings in Your Day-to-Day
Like when you’re saving money for any purpose, some extraneous expenditures might need to go if you want to max out your retirement accounts.
Cleaning house by making a budget and sticking to it can help you focus on what’s truly important. Consider your recurring expenses each month and whether they’re truly more important than financial security after you retire. Cutting back on subscription costs and eating out are two ways to have extra cash on hand for saving. According to Bankrate, 51% of adults in the U.S. with a subscription or membership account have incurred unwanted charges via automatic payments, and the average American adult spends more than $2,500 per year eating out – not including money spent on coffee and alcohol.
Remember, no amount is too small to invest in your future. Even a few dollars here and there can add up thanks to the power of compound interest, so consider where you can make cuts today! First Light Financial LLC advisors can help you construct a personal budget that works for you.
Get Aggressive When You Turn 50
Did you know that the closer you are to retirement, the more you can contribute to your retirement funds? Fidelity reports here that once you turn 50, you may be able to increase your contributions to tax-advantaged accounts by $1,000 or more. The Pension Protection Act of 2006 made catch-up contributions permanent: once you hit 50, the contribution limit on your various accounts increases, allowing you to put more money in on a regular basis. This provision applies to Roth IRAs, 401(k) accounts, and other types of funds. Investopedia has more information for you here.
Keep Your Eye on the Prize!
Some months are leaner than others, and sometimes you’ll feel like you’re falling behind in your saving goals. While it’s important to keep an emergency fund on hand, life can be unpredictable. Just because you fell short of your goal for a month or two doesn’t mean you can’t get back on track! Keep your eye on the prize: you’re saving this money to help your future self, so don’t be too harsh on the one you’re doing this all for in the meantime! Enlist the help of family and friends to stay accountable when saving, and remember there are lots of resources to help you.
How First Light Financial LLC Can Help
There’s no better time to start saving for retirement than today!
Instead of thinking about retirement as an abstract concept, you can start taking steps immediately to secure your financial freedom in the future.
Here at First Light Financial LLC, our vision is to give people access to high-quality financial planning and client services, regardless of net worth. Everyone has a path to financial freedom, but not every path is the same. Our planning process is different for each client.
If what you’ve read here today has piqued your interest, click here to reach out about our comprehensive retirement planning services.