If you’re in your 20s or 30s, saving for retirement is probably the last thing on your mind. You’re still trying to understand how to survive on your own and are living from paycheque to paycheque. Don’t worry – we get it!
So, how does retirement come into play when you can barely make ends meet? And where do you even begin with any form of savings?
Truthfully, it doesn’t need to be that difficult! These few steps listed below can help you form a stress-free saving plan to ensure you’re comfortable by the time your pension days roll around.
1. Start Early
If you happen to be in your 20s and you’re reading this – great! Now is the perfect time to start putting your hard-earned cash away and watch it grow!
If, on the other hand, you happen to be older – don’t panic! Although you, obviously, won’t have as much money as you would have had if you started saving 10 years earlier (unless you double your investments, of course), there’s still a way to turn this around and have plenty of savings for your retirement.
For example, if two people saved the same amount of money each year (let’s say $5,000), earning a 6% return on their investments, by the time they retire at the age of 65, one will end up with nearly twice as much money (up to $50,000 more) by starting at the age of 20 instead of 30.
2. Use the 50/20/30 Rule
Your life doesn’t have to be completely dull because you’re saving for retirement – you can have a balanced lifestyle and still enjoy yourself by following the 50/20/30 rule.
If you’re intrigued to find out what the rule is, here’s a breakdown:
- 50% of your monthly income should go towards your essential expenses, including bills, food, transportation and housing
- 20% of your monthly income should go towards financial properties, including student loans and other debts, mortgages, retirement contributions and savings
- 30% of your monthly income should go towards your lifestyle, including outings, gym membership, personal care and gifts.
So, as you can see, you still have plenty of money to enjoy yourself – you just need to be a bit savvier with your spending and your savings. As a wise man once advised me: don’t spend beyond your means!
3. Figure Out How Much You Need to Save
Many young people think that they can rely on their social security or national insurance, but the truth is not as many workers are investing to ensure you’ll receive the return that you’ve been promised, and you just never know when the government will choose to change pension policies!
Instead, it’s best to have your own security blanket to fall back on. This safety net will depend on the type of life that you lead, and as everyone’s lifestyle differs, you’ll need to figure out how much it is that you need to be comfortable in your old age.
When it comes to retirement, there’s the 4% rule, stating that you should withdraw 4% of your savings per year. So, let’s say you need $32,000 to live comfortably a year; this means that your entire savings should accumulate to $800,000 if you expect to have 25 years of retirement.
4. Invest in a 401(k) Plan or Employer-Funded Private Pension
If your employer has a 401(k) plan or a private pension scheme in place, you should take full advantage of it. The funds are automatically taken from your paycheque (so you don’t even know you had them in the first place) and, in most cases, your employer matches your contribution.
In the UK, all workers are automatically enrolled in the private pension scheme for the minimum of 2% and need to actively opt out if they don’t want to fund their pension scheme.
The plus side? The money is also deposited in your retirement plan pre-tax, so less of your gross income is being taxed. The restrictions on when you withdraw your funds differ from company to company, so it’s wise to investigate this beforehand.
5. Open a Roth IRA or Cash ISA
If your workplace doesn’t offer a 401(k) plan, don’t worry! You can opt for a Roth IRA (in the USA) or a cash ISA, instead. The only difference is that you will send taxed money to your account, but when you withdraw the money, it will be tax-free.
There is a limit on how much you can invest on a yearly basis, but this does differ between banks/building societies, so you will need to research before you settle with a specific company.
6. Consider Opening a High-Yield Savings Account
A high-yield savings account is a great alternative for the average worker, as long as you can resist breaking the bond on your account. High-yield accounts are, essentially, the same as a regular account with a set interest rate (usually between 1.5% and 2%), but they come with a restriction: you can’t touch the money unless you break the bond and pay a penalty fee.
But let’s say you invest $1,000 in over 10 years with an interest rate of 1.55%; you will have a total balance of $1,167.54. The great thing about this is that you don’t have to wait until retirement to tap into your savings if needed.
7. Have More than One Pension Pot
If your employer has their own private pension scheme – great! You can opt in and ensure they are paying their contributions to grow your bank balance. But you don’t have to settle for just one pension scheme.
If you happen to change jobs, you don’t have to stick to the previous pension provider that your ex-employer worked with. You can look into other options and fund both, making your savings for retirement even larger!
8. Invest in Property
As house prices are on the rise, investing in property seems like a safe bet for retirement. You can either increase your initial investment by cashing out and selling in 20+ years, or you can earn a decent amount of income by renting your property.
This option, however, does come with higher risks. There are taxes, faults and fixtures, and landlord duties that you need to take into account when you own a property.
9. Automate Your Savings
It’s easy to plan out on paper how much you will save each month, but when it comes to it, you end up spending that amount on something else that’s probably completely unnecessary.
To make sure you stick to the amount you want to save, have a direct debit set up so you can automatically make these payments! You could even set up an account that’s not accessible by internet banking so you’re not tempted to tap into these funds when you feel like you have an ‘emergency’.
Saving for your retirement sounds like such a complex matter, but when you look a little closer, you can see that it’s not actually that complicated. It’s best to assess your current finances, pay off any debts and set up the right plan for you. Whether you decide to invest in an account and property is entirely up to you. The main thing is to start your pension-saving journey today!
What type of pension scheme do you have or would you choose to have? Join the conversation below and let us know.