Saving for Retirement: A Step-by-Step Guide for Beginners

saving for retirement basics to help get you there

About a quarter of working Americans have nothing saved for retirement. While retirement is often considered the light at the end of a tunnel, it can become a significant burden if you have no savings.

To have a secure, fun, and comfortable retirement, you must develop a proper financial cushion. But saving for retirement can be overwhelming, especially for beginners.

Below is a beginner’s guide on how to save for your golden years. Read on to learn what you need to do today.

Set a Goal for Retirement Saving

Start by figuring out how much money you need to save to support your desired lifestyle during retirement. To determine how much money you need to save for retirement, estimate your desired annual income in retirement.

Once you are done, calculate the total amount of saving you need. Multiply your desired annual income in retirement by the number of years you expect to be in retirement. This will give you an estimate of total savings.

To get how much you need to save each month from reaching your goal, divide your total savings by the number of months until your desired retirement date. When setting a goal for retirement savings, consider inflation.

Figure Out Your Current Financial Situation

Knowing your financial situation lets you determine how much you can afford to save for retirement. To assess your current financial status, start by calculating your monthly income. This includes salary, bonuses, and investment returns.

Next, track your expenses. It will help you find areas where you can reduce spending to facilitate saving strategies.

Get Rid of Any Debts

Don’t forget to list your debt. While paying off debts is essential, you don’t want to do it with your retirement savings. Ensure you have a balance between paying off debts and saving for retirement.

Prioritize high-interest debts and plan to pay them off while contributing to retirement accounts. Also, create an emergency fund to avoid going into debt in the future.

Consider Your Retirement Timeline

When do you want to retire?

Your retirement timeline will help you plan your retirement savings goals and strategy. Knowing your retirement age will impact your time to save for retirement.

Once you set your retirement age, consider your savings rate. The higher the savings rate, the more money you will have in retirement. However, you may need to reduce your current spending.

Contribute to Your 401(k) Account

Take advantage of employer retirement plans, especially the 401(k) plans. Remember, money in your 401(k) account grows tax-free until you withdraw it in retirement. As a result, you can potentially accumulate more wealth over time.

What’s more, most employers usually offer a matching contribution. This means they can match a portion of your contributions, effectively increasing your savings rate.

You can also choose how to allocate your contributions among the investment options offered in the 401(k) plan, such as stock, bond, or money market funds.

Consider Other Retirement Accounts

Apart from the 401(k) plan, other retirement accounts help facilitate your savings. The eligibility may vary from one person to another. Popular retirement accounts include:

Individual Retirement Accounts (IRAs)

These personal accounts allow you to contribute a certain amount each year. They offer tax benefits that vary depending on the type of IRA.

Roth IRAs

With a Roth IRA, contributions are made on an after-tax basis. But withdrawals in retirement are tax-free.

Learn More About Getting Started with IRAs

Simplified Employee Pension (SEP) plans

You should consider SEP plans if you are a small business owner or a self-employed individual. They offer tax-deductible contributions and potential investment growth.

403(b) Plan

These plans are similar to a 401(k) plan. But they are only offered by non-profit organizations, schools, and hospitals.

To find the correct retirement savings account, ensure you review each account’s specific rules and limitations.

Start Small and Increase Over Time

If you are new to retirement savings, start with a small amount. You can always increase your savings as you become more comfortable. This can help you build good saving habits and make it easier to reach your goals.

Some of the best ways to help you in saving money include:

  • Increase your contribution rate with each raise or promotion
  • Reduce unnecessary expenses and redirect that money toward retirement savings
  • Set a percentage for increase each year
  • Avoid withdrawing from retirement accounts early, as penalties and taxes can significantly reduce savings

Invest Your Retirement Savings

Consider investing your savings in growing your retirement pool over time. When choosing an investment strategy for retirement, consider your risk tolerance and investment goals. There are a variety of ways to invest, but the most popular include:

  • Mutual Funds
  • Exchange Traded Funds (ETFs)
  • Individual Stocks (ie. AAPL for Apple stock)
  • Bonds

It’s important to assess your risk tolerance and layout your retirement goals. High risk investments can come in the form of individual stocks or even ETFs. It’s important to know what you’re investing in, but there is ample amount of reading material from advisors and online brokerages.

Some lower volatility investments you can opt for include:

  • Bonds provide a fixed income stream and are less volatile than individual stocks
  • Certificates of Deposits provide fixed income for your cash savings
  • Target-date funds are mutual funds that automatically adjust their asset allocation to become more conservative as you approach your retirement date
  • Dividend stocks and ETFs pay a regular dividend to shareholders and are less volatile than growth stocks

While these investments are generally considered low-risk, they still carry some risk. Consult your financial advisor to determine the best investment strategy for your needs. You can also diversify your investments to reduce overall risk.The goal is to invest and to stay invested.

Automate Savings

Setting apart your monthly contributions for retirement can be challenging. To make things easy, consider automating your savings. It can help you avoid forgetting.

Additionally, it can help keep your emotions in check during a volatile market. As a result, you can take advantage of potential opportunities by investing at lower prices and benefiting from market rebounds.

Review Your Plan Regularly

Your financial situation and goals may change over time. Regularly reviewing your retirement plan is vital to ensure that you stay on track toward achieving your retirement goals.

It helps you identify income, expenses, or investment performance changes. This allows you to adjust your retirement plan as needed.

Start Saving for Retirement Today

Saving for retirement takes time and discipline. If you are wondering how to save for retirement, the guide above should come in handy. At Wise Money Life, we can help you implement various ways to save for your future.

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