Retirement is this big idea that everyone has when they start working, but what is it and how do we get there? Well, retirement isn’t just some set age and plan that is the same for everyone. I think of it as having the financial freedom to live your life however you want. This could be decades away or just a few years over the horizon. No matter what timeline you have, there are a few things you will need to do to get there on time: Save, invest, and budget.
The most important thing to do is start saving early. As you let your money grow, the earnings will begin to compound and year over year your savings will grow exponentially. Time will be your greatest helper in reaching retirement. The total amount of money you need to put away if you start at 20 is a lot less than what you need to save if you start at 40. Now what if you are older and haven’t started or feel like you haven’t saved enough? Start today! Today is going to be your “early” compared to waiting for tomorrow. In hindsight, it would have been better to start yesterday but it is the best time for you now.
Now you may ask, well where and how do I save? Good question, and the general answer is retirement accounts. These refer to accounts that are tax-advantaged in some way and usually tied to your employer. Most people who work for an employer will have easy access to a 401(k), 403(b), 457 plan, or a pension. If you are self-employed, you can make use of a SEP IRA. Also, depending on how much money you earn, you can contribute each year to a traditional or Roth IRA. These are all the most common vehicles for retirement savings as they each have their own tax benefits and will allow you to invest the money that is held inside them. Each one will have their own unique investments depending on where they are held, so I can’t really point you to exactly what to invest in. You can always reach out to an advisor to look at the options and give you a recommendation on which funds to pick. The cherry on top to investing in things like a 401(k) is that your employer may have an employer match where they contribute money to your fund for free as long as you are making your own contribution. Make sure to max out this benefit at the very least.
Now you know you need to save and how to save, but how much should you be saving? That will depend on you and your individual goals and needs. But the first thing you should really do is create a budget. Break down exactly how much money you earn and spend each month. Track what you have spent your money on in the past and create a target for each category. This can be anything you spend on but the obvious ones would be gas, food, bills, etc. This will spell out exactly what you are working with and help you see how much money you have to spare for savings. If you don’t believe you have enough saved for your individual goals, you can now narrow down what to cut back on if you are spending too much in one category. How much you need to save will then change depending on your situation. Is your timeline 5 years or 20 years? Are you also saving for your kids? Do you have big plans for retirement like travelling the world, or buying a second home? Are you going to pursue hobbies? Retirement doesn’t cost the same amount for everyone, so there is no flat target number to aim for where I can say you are set for life. Just as you budgeted for your life now, you can also budget for what you plan on your retirement life to be. Once you figure out your plan for the future, then you will know what your target is.
Your retirement plan is going to be unique to you and will require a lot of planning to make sure you are on track. There is no one-size-fits-all plan to follow to know you are doing the right thing, but if you do these things, you should be able to figure out what is going to work for you. Create a budget for now and the future. How much do I need? And how much do I have to save? Start saving as early as possible. Invest your money so that it can grow over time. If you feel like you’re stuck, don’t hesitate to reach out to a financial advisor for some guidance.