Learning how to fund your retirement is not something you should wait till retirement age to plan for; even if you just got your first job, you can start now to learn how to fund your retirement. So many people have no retirement fund because they are always concerned about meeting their daily needs and feel they do not have enough money to plan for future events.
You must note that no matter how small your income is or where you are in life currently, it is still possible to create a plan to fund your retirement, so if you have not started saving for it yet, or you are worried about how you will start, this guide can get you on track with the following steps.
Tips on How to Fund Your Retirement
1. Set Your Retirement Saving Goal
If you need to save up to buy a house or a car, it will be relatively easy to estimate how much you will need for the purchase, but it is a bit more challenging for retirement funds. You need to consider many unforeseen circumstances. For example, you could face many medical expenses, and the cost of living may increase.
Also, you need to answer some questions like how often will you go on vacations, what age you plan to stop working, will you still have kids that depend on you at that age. Consider these things and the amount you spend annually to determine how much you will need for retirement.
If you do not have a good idea of what your annual expense will be when you retire, you can start saving 15% of your annual income now, and in 35 to 40 years, you will stop working.
However, if you can estimate your retirement annual expenses, you can create a more personalized savings goal. Calculate your annual expenses in retirement and multiply it by 25. The result is what you need to save up for your retirement fund. This way, you can withdraw 4% of your portfolio over a 30-year retirement.
In addition, you can use a retirement calculator to know how much you must set aside monthly to achieve this goal in your designated time.
2. Open a Retirement Account
Now that you know what you need to fund your retirement, it’s time to create a separate account for these savings. Investing in stocks is the best way to save for retirement because it offers more rewards and certain tax advantages than a savings account. However, not all investment accounts are suitable for retirement, so we will discuss the best accounts you should consider for retirement savings.
3. Employer-sponsored Retirement Accounts
The employer-sponsored retirement accounts include a 401(k) plan, SEP IRA, 403(b) plan, SIMPLE IRA, and a 457(b) plan. These plans allow your employer to invest some of your income in your retirement account automatically.
The most well-known plan is the 401(k) plan, which involves employees contributing a part of their monthly income, and the employer may match part or all of that contribution to increase profits for the employee.
With employer-sponsored retirement accounts, you don’t need to worry about having to save up; your savings will be deducted automatically and deposited into your retirement accounts, so you can watch your savings grow over time.
4. Individual Retirement Accounts (IRAs)
An IRA allows you to save up for retirement in a tax-advantageous way. You can set up this account with any financial institution that allows individuals to save for retirement. Also, this type of savings has tax-free growth.
Hence, if you do not have a job that offers employer-sponsored retirement accounts, then you can plan for an individual retirement account in two forms: Roth IRAs and traditional IRAs. To use either of them, you must have a taxable income for a year, and for Roth IRAs, you must make less than $196,000 if you’re married and filing taxes together or $124,000 if you’re single.
In 2020 and 2021, the IRA had a contribution limit of $6,000, or $7,000 if you’re 50 or older. Couples that earn up to $208,000 in 2021 and single people that earn up to $140,000 in 2021 can contribute to Roth IRAs. These limits remained the same even in 2022, but now in 2023, there is a slight increase; those under age 50 can now contribute $6,500, and those above 50 can pay $7,500.
5. Choose Your Investment
Whether you choose the employer-sponsored retirement account or the individual retirement account, you should also consider investing in stocks for long-term retirement plans. You can go with index funds, exchange-traded funds, robo advisors, or mutual funds that will earn you profits in the long run.
So you will have funds in more than one place, and for the stock investment, if you can’t manage it yourself, you should choose what an expert can manage for you, like the robo-advisor. Remember that there can’t be too many funds for your retirement; there can only be too little.
6. Set up an Automatic Recurring Deposit
If you use a workplace 401(k) plan, you are already set up with an automatic deposit from your monthly or yearly income. Still, if you choose an IRA, you must set up an automatic recurring deposit, which allows the financial institution to withdraw your balance at intervals and deposit it into your retirement accounts. This way, you don’t need to struggle with consistency.
7. Increase Your Saving Rate
If you plan to save 15% of your income for retirement, and you are not able to do it now, considering your current income, it’s fine. However, as you progress in your career, it is wise to gradually increase your saving rate because your income will also keep growing, and you will find balance in your expenses.
So if you get a raise, bonuses, tax returns, monetary gifts, and so on, you should not ignore your retirement savings. Ensure you save as much as possible before considering satisfying your wants. Also, avoid a lifestyle that causes you to spend most of your income on wants.
8. Stay Consistent
When you start saving to fund your retirement, one very important thing you should remember is that things may get complicated. So many negative events can make it very challenging for you to be in alignment with your retirement savings plan continually. But you shouldn’t panic; you must strive to stay consistent.
You can reduce your savings percentage until you are back on your feet again but ensure you are saving something from your income, no matter how small. So at every point in time, feel free to increase or reduce your savings according to your current state of living and your earnings.
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Building a retirement fund is a lifetime endeavour; it doesn’t end until you are finally retired, so it is more about persistence than brilliance. You must commit to the effort, strive for improvement, and increase your education, qualifications, and income. This early stage may be challenging, but the result will be evident with every passing year.