Although the average American spends 20 years in retirement, fewer than half have calculated how much they need to save. While retirement may seem like something to plan for “someday,” the truth is that it’s never too early to start saving. Here are some excellent tips on how you can start building your retirement nest egg.
1. Know Your Retirement Needs
Experts estimate you will need about 70 percent of your pre-retirement income (lower earners, 90 percent) to maintain your standard of living after you stop working. Taking charge of your financial future means planning ahead, so start your research now. Figure out how much you will need to retire, and set that as your goal. With a clearly defined target, it will be easier for you to hit it.
2. Save with Every Paycheck
It may be tempting to splurge on fine dining, travel, and shopping, but where will that leave you in your golden years? While indulging in extravagances occasionally is okay, set reasonable limits. A good rule of thumb is to set aside 10% of each paycheck for your retirement fund. As your salary grows, increase that percentage accordingly. Resist the urge to withdraw from your funds. You’ll lose principal and interest, and it’ll only be that much harder to build it up again.
3. Contribute to Your Employer’s Retirement Plan
If your employer offers a retirement savings plan, such as a 401(k), sign up and contribute as much as possible. Find out how much you will need to contribute to get the fully employer contribution, and how long you need to stay in order to get the funds. If your employer doesn’t currently offer a plan, suggest that it start one.
4. Learn About Investing
How you save is often as important as how much you save. Talk to a financial planner to find out as much as you can about investing. Ask questions and seek advice of successful investors. By putting your savings into different types of investments, you are more likely to reduce risk and improve your return, but it’s always important to do all necessary research first.
5. Open an Individual Retirement Account
An Individual Retirement Account (IRA) is an easy way to save. You can put up to $5,000 a year into an Individual Retirement Account, even more if you are 50 or older. When you open an IRA, you can start a traditional IRA, or a Roth IRA. The tax treatment of your contributions and withdrawals depend on which option you select, so do some research first.
Although these tips will point you in the right direction, you’ll need more information. Talk to your employer, your bank, or a financial adviser for practical advice. Ask questions and make sure you understand the answers. Remember, it’s never too early to start saving, but it can easily become too late.