Are you trying to figure out how to afford retirement? Here are several ways to increase your retirement savings. (iStock)
If you want to save more money in 2021, you’re not alone. A Fidelity Investments study found that 44% of Americans want to boost their savings rate.
Increasing your retirement savings can be your ultimate money goal this year, as one survey found that 27% of respondents stopped saving for retirement in 2020. Another one-quarter (26%) of Americans still need to start saving for retirement, according to a Federal Reserve study.
Whether you're paying for health care, adding to a college savings account or investing in the stock market, making smart financial decisions over time can help you ultimately achieve your retirement goal.
If you're planning for retirement and don't want to leave money on the table, you can maximize your earnings with these high-yield savings options on the Credible marketplace.
5 SIMPLE MOVES TO SHIFT YOUR RETIREMENT SAVINGS INTO OVERDRIVE
How do I ensure I have a sound financial plan to prepare for retirement?
There are several ways to save money for near-term expenses and retirement savings. It's also important to acknowledge social security, another form of retirement benefits for older Americans or those who are disabled. Your social security benefits may vary depending on your retirement age, although the traditional age has been 65. Here are eight ways to help you prepare your finances ahead of retirement:
- Build an emergency fund
- Make a CD Ladder
- Save 20% of income
- Determine your retirement budget
- Set a retirement savings goal
- Identify debt to pay off
- Earn a 401(k) match
- Contribute to an IRA
1. Build an emergency fund
Saving at least three months of cash into an emergency fund should be your first priority. You can tap your emergency fund instead of your retirement savings to avoid an early withdrawal penalty when a surprise bill arrives or unexpected life events occur.
A high-yield savings account or money market account can earn a higher annual percentage yield (APY) than a traditional savings account. These FDIC-insured deposit accounts can also have no monthly service fee or minimum balance requirements.
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2. Make a CD Ladder
A CD ladder is a deposit strategy used to save money over different lengths of time – like six months, one year, and so on – to take advantage of higher interest rates.
After saving for an emergency fund, you can place your cash into a bank certificate of deposit (CD) to earn a fixed interest rate that can be higher than a savings account while avoiding the volatility that accompanies stock investing.
CDs can earn higher interest rates than future savings account yields if the Fed benchmark rate decreases. You can renew the balance at a new APY at the maturity date. Savers can also make a penalty-free withdrawal during the grace period.
3. Save 20% of income
Practicing the 50/30/20 budget rule can motivate you to save at least 20% of your income for future financial goals, from retirement to a home down payment. Look for ways to trim expenses to save money (20%) and pay your essential (50%) and unessential (30%) bills.
You can schedule automated deposits into a high-yield savings account, CD or investment accounts. You may also mobile deposit an extra debt payment if the interest rate is higher than your potential investment returns.
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4. Determine your retirement budget
Your personal situation determines how much you should save for retirement. Start by calculating your current expenses, expected post-retirement expenses and benefits.
You can use these numbers to estimate your monthly and annual retirement expenses.
5. Set a retirement savings goal
The "Rule of 25" is a simple way to figure out your retirement savings goal by multiplying your annual expenses by 25. For example, $40,000 multiplied by 25 means you need a minimum $1 million nest egg.
Generally, a retirement savings calculator is a valuable tool to estimate how much you should put away each month to achieve your goal.
TOP RETIREMENT PLANNING TIPS EVERYONE CAN FOLLOW TO SAVE MORE MONEY, EVEN IN A PANDEMIC
6. Identify debt to pay off
You can consolidate your high-interest debt like credit cards by comparing personal loan options with an online marketplace like Credible.
After paying off the higher interest rates, you might focus on student loans and mortgage debt. An online tool like Credible compares student loan refinancing rates from multiple lenders at once without affecting your credit score.
You can send a loan payoff by wire transfer to decrease your credit utilization rate. decreases, you can save or invest your former monthly payment.
7. Earn a 401(k) match
If your employer offers matching 401(k) contributions, consider investing enough to earn the full match. This "free money" grows tax-deferred and can make retirement planning easier.
If you're self-employed, however, a solo 401(k) is your best bet to have the same benefits as a traditional 401(k) account. In addition, a Roth 401(k) has a defined contribution plan, limiting those below age 50 to $19,500 in 2021.Having the right 401(k) plan can help you plan for a soft landing upon retirement, but so can an IRA.
8. Contribute to an IRA
Paying off debt can improve your credit history but also give you more money to invest for retirement. A tax-advantaged individual retirement account (IRA) is an effective way to reduce your taxable income.
You may prefer a Roth IRA as you make contributions with after-tax dollars, but withdrawals are tax-free.
A traditional IRA is the better option if you want an upfront tax deduction for the contribution amount. But, each withdrawal is taxable and you may need to save more to offset the taxes. Using an IRA calculator is a simple way to determine how much your contributions will be worth upon retirement.
It's important to note that both Roth and traditional IRAs have annual contribution limits. In 2021, your contributions cannot exceed $6,000 if you're under age 50, and $7,000 if you're older than 50.
Additionally, a SIMPLE IRA Plan (Savings Incentive Match Plan for Employees) differs from a Roth and traditional IRA in the amount you're able to contribute. It's generally suited for smaller businesses with fewer employees, according to the IRS, and an employer can match two or three percent for each employee.
Final thoughts
Making savings a priority can help you achieve your financial goals. To start saving for retirement, you should first focus on being able to afford a financial emergency. Then, you can tackle debt while building long-term wealth.
Making informed investment decisions, consulting with a financial advisor and fixing bad credit are among a number of ways to prepare if you're near retirement.
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