When you think about how to prepare for retirement, you should know that the earlier you plan and save, the better. Due to compound interest and tax deferrals, you will benefit more the earlier you start saving for retirement. You may be wondering how to prepare for retirement in your 30s or generally how to save money in retirement
Do you know how much you need to save for retirement? How can you maximize your savings?
Think about the kind of retirement you want
This visualization will help you understand how much money should be saved for retirement. Will you want to live differently when you retire? Start visualizing the type of lifestyle you want to live when you retire so you can tailor your savings goals to that lifestyle!
- At what age would you want to be when you retire?
- Will you still work part-time?
- Where will you live? Do you want to live domestically or internationally?
- Will you be renting a house, or will you own your house?
- What will your monthly costs be?
Start saving today
Most (if not all) how to prepare for retirement articles you read will encourage you to start saving today. The reason being is over time you can earn money from your savings via compound interest.
- Compound interest is the interest you earn on interest. It comes from reinvesting the interest you earn. It works in your favor.
- Hypothetical examples suggest that even a 25-year-old who invests $75 per month would accumulate more assets by 65-years-old compared to a 35-year-old who invests $100 per month.
- Put as much as you can away now so that you can reap the rewards later.
- Some financial experts recommend saving 15% of your pre-tax income towards tax-advantage accounts.
Set a goal
Take time to carefully consider retirement expenses while factoring in inflation. Will you have other expenses that you might not have right now (such as children’s expenses)?
- How much do you want to have when you retire?
- Will you be traveling when you retire?
Automate your savings to a retirement plan
Take advantage of tax deferrals to a retirement account. Set up automatic payments to your Individual Retirement Account (IRA) or 401(k). This way, the money gets deposited into your retirement savings plan before you have to think about it.
- 401(k)s have a high contribution limit ($19,500 if under age 50), and sometimes employers are willing to match your contributions. Check with your employer to see if they match what you put in.
- If you are under 50, you can contribute up to $6,000 to an IRA. If you are 50 or older, you can contribute up to $7,000 to an IRA.
- Money contributed to a Traditional IRA may be deductible on your taxes that year. Then, when you withdraw money from that account in retirement, you pay taxes then.
- Money contributed to Roth IRAs are not deductible on your taxes that year. However, withdrawals you make from that account when in retirement are not taxed.
Diversify your savings when thinking about how to prepare for retirement
Don’t put all your eggs in one basket! Your IRA is just one piece of the puzzle. Consider investing in other assets, such as property, mutual funds, or bonds. These investments also help you save money in retirement.
Take advantage of employer matching
If your employer matches your IRA investments, take advantage of that! Deposit the maximum amount that your employer matches.
Continue to reduce your debt
Pay off your credit cards every month or pay as much as possible towards your credit card debt. When possible, accelerate your mortgage payments. As a rule of thumb, reduce your existing debt and avoid accumulating new debt.
Saving for your ideal lifestyle when you retire is a marathon, not a sprint
When you build your wealth over time, you don’t have to worry about tackling everything all at once.
Remember that over time, your retirement account will build! Try to save at least 10-15% of your pretax income to start. You’re already ahead of the game by thinking about this now!