Save and Invest for Retirement

“No matter how much money you earn, you’ll never build wealth and achieve financial freedom if you spend more than you make.”

Saving and investing for retirement depends on your current age, cash flow, desired lifestyle in retirement and the types of retirement accounts that are available to you. No one is born knowing how to save or to invest. A few people may stumble into financial freedom—a wealthy relative may die, or a entrepreneurial business may take off. But for most people, the only way to build wealth and attain financial freedom is to save and invest over a long term.

The amount of money you’ll need to live on in retirement depends on many personal factors, some you can control (such as when you start saving and how you budget) and some you can’t (including the length of your retirement, inflation and your health during it). As you save for retirement you want to amass the biggest pile of assets possible. More savings and investments equals more confidence and room to breathe. Less savings equals less confidence and more restrictions.

“Investing makes it possible for your money to work for you.”

There are basically two ways to make money.

You work for money. – Someone pays you to work for them or you have your own business.
Your money works for you. – You take your money and you save or invest it. When your money goes to work, it may earn a steady paycheck. Someone pays you to use your money for a period of time. Your money can make an “income,” just like you.

In general, experts recommend socking away 10%–20% of your income toward your future. Even if you’re not able to contribute that much early in your career, time and compound interest are on your side. And thanks to the power of compounding, the earlier you start investing, the less capital you may have to save to get you to your financial goal.

With the power of compounding, you earn interest on the money you save and on the interest that money earns. Over time, even a small amount saved and invested can add up to big money.

Start early and pay yourself first

The earlier you start investing and growing your money for retirement the better, but it’s never too late. Regular contributions can keep your portfolio on track. Some strategies include:

If you have a workplace 401(k) or 403(b) plan, decide how much of your salary to have deducted from your paycheck and deposited in your retirement account. Ensure you pay yourself first to avoid spending the money you set aside for saving.
Budget using the 50/30/20 rule: 50% of your income should go toward essentials, 30% to discretionary spending, and 20% toward long-term goals (like retirement).
Start catch-up contributions. This rule allows those over 50 to add more to an IRA or 401(k) (or similar plan), giving you a chance to make up lost time if you’re late to the retirement savings game.

There are many methods to meet your retirement savings goals, including tax-friendly workplace plans and IRAs. Diversifying how and where you save your money can be a smart strategy, especially when considering tax implications and rates of return. Here are some options for where to park your retirement savings.

401(k)s and other workplace plans – A 401(k) is a tax-deferred, employer-sponsored retirement account, typically for corporate workers. Unless you have and opt for a Roth or after-tax option, you don’t pay taxes on the money you contribute or your account as it grows; instead, you’ll owe income tax on withdrawals. 401(k)s, 403(b)s and 457s are “defined contribution” (DC) plans. With DC plans, you contribute your own money, and your employer or organization can choose to contribute as well, typically by matching some of what you save. If yours does, make sure to contribute at least the amount of the match. It’s “free money” and can provide a powerful boost to your savings.
Individual retirement accounts (IRAs) – The most common types of IRAs are traditional and Roth IRAs. Which to choose can come down to taxes—that is, whether you want a tax break now or in the future. With a traditional IRA, some or all of your contributions may be tax deductible, but you‘ll owe income tax on withdrawals. With a Roth IRA, you contribute after-tax dollars, but withdrawals (and any investment gains) are tax free as long as you meet certain criteria.
Annuities – Another tool to consider is an annuity. Annuities can provide guaranteed income, no matter what your other investments do. You can choose between a fixed or variable annuity. Fixed annuities offer consistent installment income, while income from a variable annuity fluctuates depending on how the stock market performs.
Taxable accounts – Taxable accounts are offered through brokerage firms and enable you to invest in stocks, bonds, mutual and exchange-traded funds (ETFs) and a range of other investments. As the name suggests, you’ll owe tax on any interest or dividends earned though the accounts, as well as capital gains on investments you sell at a profit.

Other sources of retirement income

As you consider your budget, it’s helpful to understand other potential income sources during retirement. Though rare, a few companies still offer pension-style benefits. And most workers contribute to Social Security throughout their careers and will be able to receive regular payments when they retire.

Defined-benefit plans – With defined-benefit plans, your employer fully manages and contributes to the account. When you retire, you receive a guaranteed income, typically in one “lump sum” payment or at defined intervals. The amount you receive will depend on many factors, including your salary and years of employment.
Cash-balance plans – Some companies offer cash-balance pension plans. Like traditional pensions, employers fund the accounts. But, like 401(k)s, employees manage the distributions. Also, the amount an employer can contribute to your account rises with age.
Social Security – Don’t forget about Social Security, which you contribute to through FICA taxes. The amount you’ll receive Opens in new window each month from Social Security depends on many factors including your lifetime earnings and how old you are when you start taking payments.

How to save and invest more

It’s one thing to have money to invest. But how to invest is a whole other subject. It can be particular challenge for busy and non financially savvy individuals. Investing your retirement funds in stocks could help give your money a chance to grow over time often faster than the rate of inflation.

There’s always time to save more for retirement while you’re still working. Here are some tips.

Make retirement savings a priority: Put your future first by planning for it. Set up automatic investments so the money you put toward investing comes directly out of your paycheck. After all, if you don’t see it, you’re less likely to miss it.
Maximize retirement accounts. Saving as much as you’re allowed Opens in new window in tax-favored retirement accounts is a great goal to have. But before you can max out, start small. For example, if your employer matches contributions to your workplace plan, it’s like free money—so make sure to save at least enough to earn every matching dollar.
Save in a brokerage account. If you’re able to stash some extra funds in a taxable brokerage account, do so. This money won’t provide tax savings, like a 401(k) or individual retirement account (IRA) can. But it’s a powerful way to build additional funds for the future.
Tax planning is an important part of retirement planning. Having a diversified tax approach, with savings in a traditional pretax 401(k) or tax-deductible IRA, plus an after-tax Roth account (which can mean tax-free withdrawals) and/or a brokerage account, can save you now and in the future. A financial planner or tax professional can help with your strategy.

When saving and investing for retirement, four factors are key in determining how much you’re going to have when you reach your leisure years. They are:

Time horizon – The number of years during which you save.
Amount or your retirement number – How much you save per year.
Rate of appreciation – How much your assets can grow through interest and investments.
Rate of depreciation (or loss of purchasing power) – How much you may lose from inflation, taxes, and bad investments.

The best investments depend on when you will need the money, your financial goals, and if you will be able to sleep at night if you purchase a risky investment where you could lose your principal.

Being wealthy is not about how much money you earn each month but is about how much you’re able to save and invest for the long term. Everyone wants to build wealth and retire well. But investing to grow your money and to build wealth will lower your dependence on your job, giving you more options in life and results in financial freedom. Investing for building wealth may enable you to retire early in life.

References:

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