Saving and investing for retirement as early as possible is the best way to achieve financial wellness in the latter part of your life. This is due to the power of compounding interest. This means you will earn exponentially more than the value of your deposits because over time, you will earn interest on top of the interest you've earned since you started investing.
Even if you didn't start saving for retirement early, you can still create a plan that works for you. Here some quick tips for getting there:
Find a Financial Adviser
Look for an adviser who is a certified financial planner (CFP). They are licensed and regulated, and take mandatory classes on different aspects of financial planning. There are plenty of reputable ones out there to assist you along the way. They will help you determine how much you'll realistically need to save, and then develop a plan to achieve your goal.
Focus on How Much to Save
If you're not sure how much is enough, spend some time using a retirement calculator. These calculators will give you a starting point for understanding how much you will potentially need in your retirement years.
Determine Where to Invest
There are a number of investment vehicles designed specifically for retirement. A Traditional IRA can be a great way to build your retirement nest egg while enjoying the tax benefits. Contributions may be tax deductible depending on your income, tax filing status and coverage by an employer-sponsored retirement plan. You won't pay tax on your earnings until you make withdrawals. Contributions to a Roth IRA are not tax-deductible. However, your earnings grow tax-deferred and withdrawals can be made tax-free.
Try to adopt an automatic investment plan, investing the same about of money at regular intervals regardless of share prices. This strategy helps you avoid trying to time the market and enables you to benefit from the effects of compounding returns. Additionally, by automating your investing, you significantly increase your chances of hitting your targets rather than spending money on unnecessary expenses.
Understand How Much You'll Receive from Social Security
If you are an American citizen, then you will receive a monthly social security check in your later years. The size of this check is based on your non-retirement salary and the year that you decide to retire. The later you wait, the higher your social security payments will be.
Consider the Lifestyle you Envision in Retirement
Many experts recommend that you try to save enough to use 70 to 80 percent of your current annual income. This could include income from all sources, including your retirement accounts, other investments, Social Security and possibly a company pension or 401(k) plan.
Review Your Plan
After you develop a retirement plan, review it annually to ensure that your savings and investment choices are on track to meet your retirement goals. If they're not, you may need to increase your savings, re-balance your investments, rethink your expectations for living in retirement.
What Happens if You Retire and You Haven't Saved Enough?
According to the National Institute on Retirement Security, the median retirement account balance for American households nearing retirement is $12,000. Twenty-eight percent have saved less than $1,000. This is not enough for most people to live off of.
If you find yourself in this situation, there are a couple of things you can do. First, do you own your home? If you do, you may be able to sell your home and downsize. The proceeds from the sale of your home could provide you with some much needed income.
Reexamine your budget. If you know you may only be getting Social Security income, take a look at budget and see how you can make changes to work for you. You can also consider a part-time job to help supplement your Social Security income.