Estimated reading time: 10 minutes
Worried you’re behind the “Magic 8 Ball” when it comes to investing in retirement savings? If your retirement fund is a bit anemic (or nonexistent), there’s no time like the present to get started.
I’ve talked to many people who put off investing in retirement because they feel it’s too far in the future (and they need to address immediate needs). I talk to others who think they’re so behind that there’s no point. No wonder they’re in despair!
Even if you’ve put your head in the sand, remember, time marches on. Before you know it, you’ll hit retirement age. It’s important to consider how you’ll prepare. Even if you plan on working into your 70s or 80s, life might throw you a curveball. It’s best to prepare by investing in retirement.
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How to Get Strategic About Investing in Retirement
No matter what phase of life you’re in (40s, 50s, 60s…) there’s no time like the present to start investing in your retirement accounts. There’s no set age as to when you should start saving for retirement, but ideally, you should begin as soon as you start working. If you haven’t started yet, don’t panic, though. Even if there’s nothing in your retirement accounts now, you can save hundreds of thousands of dollars in a short time if you’re strategic about your plan.
Regardless of how much or little you’ve earmarked toward your retirement, there’s one area you shouldn’t brush off—your employer-sponsored qualified retirement plan! Your employer-sponsored qualified retirement plan is often crucial to making investment headway. These plans are built to help you save money and build your nest egg quickly and strategically.
If you’re on the fence about investing in your employer-sponsored qualified retirement plan, remember these three essential factors:
First, an employer-sponsored qualified retirement plan offers the massive advantage of compounding interest. Your earnings grow steadily, tax-deferred. As you’re accumulating more wealth, you don’t need to worry about taxes each year. Putting money away in a retirement plan to earn interest for you is a much wiser investment than handing over the money to Uncle Sam to take his cut today.
Second, remember many employers offer matching contributions. Think of it as FREE money, people! Do NOT pass this up. Always invest an amount at least up to the employer’s investment. For example, if you get a 4% match on what you’re contributing to your 401(K), your employer will match up to 4%. If you’re contributing 6%, your employer will still only match the 4%, but why turn down free money?
To learn more about the various retirement plans offered by employers, visit our post on Investing: 7 Retirement Plans Explained.
The third factor is that many plans offer a vast range of funds to choose from. You may choose a money market account or a higher-risk account, depending on your risk tolerance. There are so many options for investing in retirement, and you’ll find various funds you feel very comfortable with.
It’s important to remember, as Benjamin Franklin said, “Time is money.” There’s no time like the present to save for your senior years.
Tough-Love Time: You Can’t Afford NOT to Invest
I’m going to give it to you straight: you need to start investing in retirement now.
I know for some people, putting away more money is a struggle. There are those who are struggling to save, and investing more money in tomorrow’s rainy day may seem like a big stretch. In fact, putting money away now may feel downright impossible. It’s essential to look at investing your money from two different angles.
The first area to explore is: How much do you realistically need to start investing in retirement right now? You can get too comfortable with the idea of not saving enough, and this will lead to dire straits in the not-so-distant future. You need to get a clear picture in your mind of precisely what amount you need to start regularly investing in retirement. Look at a retirement calculator tool (like this retirement calculator from NerdWallet). This tool will give you a realistic picture of your retirement savings based on factors like your age, income, and planned retirement date.
The second question to ask is: How much can you actually save? Here’s the time you need to be completely, even brutally honest with yourself. Don’t just look at how much you could “comfortably save” (especially if you’re behind on investing in retirement). To afford your senior years, you may need to make budget cuts. You may need to give up some things you love or even pick up a side hustle for additional cash. It’s also important to note if you’ve been letting your finances slide by, get your money organized for a clear snapshot of your budget.
Now, it’s important to stay realistic and honest as you explore these two questions. Let’s get real—no one will live in a state of perceived deprivation indefinitely. You may think you’re going to give up all spending and live on a shoestring budget, but remember: Life happens! It’s not sustainable to believe you will give up everything.
Instead, it might be far more feasible for you to find a way to earn extra cash to tuck away towards your retirement. You may realize downsizing your home, living with one car, or forgoing a cruise for a staycation is doable. Or you may look at your lifestyle and realize you need a higher paying job or a plan to keep it going. The important part is to look ahead realistically. Don’t ignore the problem. Find an achievable plan for investing in retirement, so you’re successful, not discouraged.
Can You Rely on Social Security?
I’ve heard several people say they’re going to hold out for social security and hope there’s enough to cover their retirement years. Unfortunately, this plan isn’t as sound as you may first think. The truth is, social security doesn’t pay out that much.
For many people, social security benefits are barely enough to get by. According to AARP, the average Social Security retirement benefit in 2019 is $1,461 a month (or, $17,532 per year). Even if you own your house and live frugally, Social Security doesn’t offer much money to live on.
Even in the current best-case scenario, the maximum monthly Social Security benefit an individual who files a claim in 2019 can receive per month is:
- $3,770 for someone who files at age 70.
- $2,861 for someone who files at full retirement age (currently 66).
- $2,209 for someone who files at 62.
These Social Security numbers aren’t looking as stable in the future either. The government may run out of cash reserves for Social Security by 2034, thanks to the increasing number of retirees and a drop in the birth rate. While this won’t mean the end of the Social Security program (the government should continue to payout 79% of benefits until 2090), it could make the benefits leaner. Congress is taking measures to deal with the issue, but it may result in changes like raising the retirement age.
According to the latest Bureau of Labor Statistics data (based on 2017 figures), “older households” (defined as 65 years and older) have average expenditures of $49,542 a year, or roughly $4,129 a month. Compare the numbers from the BLS of what was spent in retirement then, to the 2019 figures from Social Security of what is paid now, and you’ll see there’s quite a gap.
Even if you get the maximum payout from Social Security, you will face a deficit. It’s important not to rely on those social security numbers since they could quickly shift with the economy and demographic factors in the future. Set your plan for investing in retirement and look at Social Security as just that—a security measure to help bring you extra peace of mind.
Figure Out What You Need to Invest in Retirement with the “Rule of 72”
You may or may not have heard of the “Rule of 72,” but this math shortcut will help you quickly calculate growth rates. Let me explain: This is a formula you apply to any growth rate, from finances to population. In the case of retirement investing, the Rule of 72 helps to estimate the number of years required to double invested money at a given annual rate of return. For a helpful calculator, check out Better Explained.
The Rule of 72 formula is: Years to double = 72 / Interest Rate
So for example: At 6% interest, your money takes 72/6 or 12 years to double.
There are two reasons why the Rule of 72 is so helpful:
- The Rule of 72 is a fast mental math shortcut. It comes in handy for mental calculations to quickly gauge an approximate value.
- The Rule of 72 quickly helps you compute the annual rate of compounded return from an investment, given how many years it will take to double the investment.
If you’re behind the Magic 8 Ball in your retirement savings (or suspect you MIGHT be behind), the Rule of 72 estimates the doubling of an investment’s value based on a logarithmic formula. In other words, you will see how long it will take to double your investment. This tactic helps you understand (and appreciate) the positive effects of compound interest. You will quickly see WHY it’s so important to start investing in retirement today.
Finally, no one can deny the feeling of giddiness you get when you realize your money has DOUBLED. The Rule of 72 lets you see an estimate of how long it will take for your money to double, depending on your risk tolerance. This estimate rule also helps you if you’re not so keen on using a calculator when you’re trying to compare investments quickly.
Learn the Rule of 72 to help you quickly save time. In a nutshell, it’s a useful mental math shortcut and who doesn’t love to save time?
If you’re a little late to the game on investing in retirement, don’t worry. No matter what your retirement plans or age for retirement, you can still keep going. These days, retirement doesn’t mean sitting around in the rocking chair. Life keeps going! Many people still enjoy vibrant activities (including work) well into their senior years. Even if you don’t work a traditional job, keep in mind when you retire, you may still find ways of earning money. You still wake up, have things to do, and have a purpose.
If you already consider yourself older, remember age has many advantages. With age comes wisdom, peace, insight, and a greater appreciation for what you have. Even if you need to continue saving for retirement into your retirement years, compound interest will still work to your advantage. Your money will still grow. Just because you’re saving for retirement IN retirement doesn’t mean your money stops working for you.
No matter where you are with investing in retirement, there’s no time like the present to get started! With savvy saving and investment strategies, you’ll be ready to live comfortably in your golden years.
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