If you’re in your 20s or 30s, saving for retirement is probably the last thing on your mind. You’re probably still trying to figure out 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 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 a personal retirement calculator
By using a tool like a personal retirement calculator, you’ll be able to have a clearer picture of what you can or need to save every month and at what age you’ll be able to retire. By doing so, you’ll set a goal that you’ll need to work towards and can even track milestones along the way. If you’ve reached a milestone, why not set yourself a small reward for your saving efforts?
There are a handful of personal retirement calculators suitable for any location – but if you can't seem to get on with them, consider hiring a financial adviser who will able to put all your accounts in order and give you a unique saving plan to follow.
3. Follow 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!
4. 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 they’ll receive the return that they’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.
5. 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 a 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.
6. 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.
7. 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.
8. Review your spending habits
If you’re young, you probably think that you have nothing to worry about! Reward yourself for your hard work with weekly happy hours and daily dine-outs, right? Wrong!
Although you might not think about it now, your lavish spending habits are having an effect on the quality of life that you will have later on!
Start thinking about your later years now, and reign in your spending habits. You can start by reviewing everything that you spend your money on and make reductions, such as weekly spending allowances and cheaper insurance, helping you save more for your retirement.
9. 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.
10. Save any extra funds
Did you get a raise? Do you have access to an inheritance or receive a tax refund? Don’t put this money towards your spending allowance. Instead, be strict and place it straight into your retirement pot! While you might be resenting the idea now, you’ll be thankful when you have a comfortable cushion to fall back on at retirement!
11. Calculate how much you will need
While it’s good and well calculating how much you can actually save – the more, the better, right? – it’s actually important to identify how much money you will need once you’re retired.
You’ll need to take into account the growing rate of living expenses and also note that your daily spending will be higher since you won’t be at work for eight hours a day. You’ll also naturally spend more money if you do things outside of your house.
12. Get rid of any debt
By the point of retirement, you don’t want any looming debts hanging over your head! So, start making a plan now of how you will pay back any personal and business loans and when your mortgage will be paid off.
If you want to get serious about saving for your future, start paying back any money that you owe. Besides, repaying loans faster will probably wipe off some money that you would have simply paid in interest alone.
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!
This article is an updated version of an earlier article originally published on 24 September 2018.