When it comes to retirement, the main goal is to be able to retire when you want to. How you live becomes the next question. I think that everyone would like to be able to retire and not have to worry about money. They want to retire rich!
Retiring rich doesn’t just happen, it takes work, planning, a little self-discipline, and goal setting. Here are a few rules to help your retirement nest egg grow.
1 – The number one rule that you must follow is to spend less than you earn. If you are always spending more than you earn, you will never have enough money to save. The key to not only being able to retire, but to retire rich, is to save. How much should you save? That depends on how long you have until you want to retire. In our May article 401(k) Common Questions we outlined how much you should start saving based on how many years you had left until retirement. Here is the simple chart
Years Until Retirement Savings Rate (as % of Gross Pay)
30 - 40+ Years 10 - 13%
20 - 30 Years 13 - 20%
10 - 20 Years 20 - 40%
5 - 10 Years 40 - 120%*
* Would need to push retirement to a later date to accomplish goal
2 – Accept free money when offered. If you were approached by someone on the street and they offered you $50, would you accept it? Before you accepted you might ask, “what’s the catch?” but in the end if it were free, you would accept it. Companies that offer a 401(k) match are doing just that, with one caveat, you must participate in order to get the free money. Some may see this as a ploy, but the company is saying, “If you care about your retirement, I do too, and will help you achieve your retirement goal.” When free money is offered, take it. You won’t get rich by passing on free money.
3 – Take advantage of tax saving vehicles. 401(k)’s and IRA’s are great opportunities for you to receive tax breaks. With pre-tax/traditional 401(k) and IRA’s you can invest tax-free and the money grows tax-free. When you retire and begin taking distributions, you will then pay taxes. With a Roth 401(k) or IRA, you will pay the taxes on the contribution now so that when you retire and begin taking money out it is tax free. With a Roth the growth that occurs in the account is nontaxable. Thus, you can see that with a pre-tax/traditional retirement account it is tax deferred, where a Roth is a tax savings.
4 – Postpone retirement until age 70. There are pros and cons to this, but from a financial standpoint there are only pros. Now a days, we are living longer which means we will need to fund retirement for a longer period. If you work until age 70 and postpone filing for Social Security, you have reduced the number of years you will fund for retirement, and your Social Security check will be larger. Keep in mind that your Social Security check will only grow until age 70.
We hope that you had a great summer and are looking forward to the cooler weather. We appreciate the opportunity we have to work and associate with you.