Written by Today, we’ll be answering the question. What’s the best way to save money for retirement? Everyone wants to know how much money is enough. Enough for retirement and enough for the lifestyle they want to live. The reality is we don’t want to worry about money. We don’t want to run out of money too soon. And we don’t want to sacrifice our lives to have enough money for retirement. There is a balance we are all seeking.
1. Start with a plan
Starting with a plan is essential to finding the best way to save for retirement. Oftentimes, a plan comes down to two money questions. You want to know the number you need to have in retirement. Then, you want to know how much you need to invest each month to accomplish that goal. Oftentimes, we are not in a place to invest the proper amount. We have a family, old debt and other pressing obligations.
In that case, it is best to start investing small. Your plan may require you to invest 20% of your salary. Until you can do that, how about investing 5% or 10% of your salary? You will still be moving towards your goal and building sound financial habits. Then, as your salary increases, you devote the entire increase to your investments. In other words, maintain your exact same lifestyle and invest your raises. Before you know it, you will be successfully investing 20% (or more) of your salary.
2. How much money you need?
There are a variety of ways to determine how much money you actually need to retire. Some of them will say, just multiply however much you make annually by 25. For example, if you make $100,000 a year, that would mean you need $2.5M for retirement. Once you have your number, all you need is your rate of return. Which is how much money will your investments make each year. If you plan on receiving a 5% return, you’ll need more money than someone getting a 20% return.
The only thing left to do is to decide what investment vehicles are you going to use. Do you prefer real estate, investments or your business? The tax implications are different for each one and require a comprehensive approach.
3. Have a long term strategy
Retirement is not something that we’re trying to do in one year or two years or even three years. Having a 5, 10 or 25 year strategy is better than having a 5, 10 or 25 month strategy. You may want to focus on debt elimination the first five years. Then you can move onto generating enough income to be financially independent. The last phase may be legacy planning or lifestyle. The proper plan will provide you the direction you need. It is not about the money, as it is about the goals you have set for yourself.
What if you discovered a 5% return will accomplish all your goals? Then, you don’t need to be as risky with your money. Instead of trying to hit a homeroom and strike out, you are now focused on hitting single. Don’t mind my baseball analogy. 🙂
4. Check in on your plan regularly
Out of all the uncertainty in the world, you can be certain things are going to change. Your goals and aspirations will change and you need to be aware of that. As your goals change, you need to update your plan.
Another reason to reevaluate your plan is the performance of your investments. Ideally, your investments are making money. However, as your investments make more money, you need to check in and make sure your portfolio is still balanced. If you wanted 50% of your investments to be in the hospitality industry, but the growth in the industry now has your portfolio made up of 60% hospitality – you need to sell your extra hospitality shares. This often means your less than stellar performers are making up a smaller percentage. The good news is this approach encourages you to buy low and sell high.
Invest where it makes sense
Based on factors such as, how long you have before you retire, your risk profile, and desired lifestyle. We can determine where it makes the most sense to invest. If you have the time or interest, you can choose your own 20-30 stocks. This can save you money on the fees many mutual funds charge to actively manage your portfolio. You can also invest passively in index funds. Invest are a compromise between you choosing the stocks and paying someone else to actively manage your money. The fees are usually much slower in index funds, but you can expect a return aligned with the market you are indexing.
Asset allocation has been proven to be a great way to limit human behavior in the decision-making process. Instead of you purchasing a stock when it’s most popular, you sell the stock. Which the same as selling high. Which we all want to do. Then, when the stock is declining, we buy more of it. Which is the same as buying low. Human behavior tends to have us doing the opposite. We sell when the stock is declining out of fear of losing our money. Then we buy high as the stock is climbing for fear of missing out.
5. Have more than one retirement account
Each retirement account is designed to solve a specific problem, by offering a specific benefit. Whether you’re going to have a tax benefit today or a tax benefit in the future will determine where you invest for retirement. Ideally, you want to ensure wherever you invest your money, it is at a bare minimum keeping up with inflation.
Starting with retirement plans your employer offers is usually a good start. Most employers offer a defined-contribution plan, such a syour 401(k) or 403(b). These plans are good because you can often access free money through the employer match.
A ROTH IRA is a good account if you want tax-free money in the future. The trade-off is you are paying taxes on that money today. This account is great if you are worried about taxes being higher in the future.
Final thoughts
The best way to save for retirement depends a lot of where you are in life. Do you need to get out debt? What percentage of your salary can you devote to retirement? When do you want to retire and what return do you expect on your investments? Not to mention the tax implications tied to which investment vehicle you choose. The reality is a combination of several investment instruments is the right choice. It’s not as sexy as choosing one instrument or swearing off another, but it is the truth. There is a right and wrong situation for every investment.
Resources: Image from Freepik.com