If you have a goal to save money this year, then you are not alone. A study by Fidelity Investments found that about 44% of Americans also have the same goal of increasing their savings.
But whether you are saving for retirement, college or healthcare, making smart financial decisions would ultimately help you achieve your retirement goals over time. Here are some steps you can take to prepare your finances ahead of retirement.
Build an Emergency Fund
Grow an emergency fund with at least enough cash to cover six months of your expenses. As such, when you have an unexpected bill, you can tap your emergency fund instead of making premature withdrawals from your retirement savings and attracting penalties.
Instead of a traditional savings account, consider putting your emergency fund in high-yield access or money market account. These accounts typically have no minimum balance or monthly fee.
Make a CD ladder
A bank certificate of deposit (CD) allows you to save money over a period like six or twelve months to take advantage of high-interest rates. After saving enough for your emergency fund, you can put the money into a CD to earn higher fixed interest than obtainable with a savings account while also avoiding market volatility.
CDs also earn higher interest than future saving account when the federal benchmark decreases. It has a grace period when savers can make penalty-free withdrawals.
Save 20% of Your Income.
Adopt the 50/30/20 rule that requires saving at least 20% of your income for future financial goals like retirement, debt repayment, and home down payment. Look for a way to cut down your expenses, so you only spend 50% of your income on fixed expenses, 30% on variable expenses while saving at least 20%.
You can schedule your payment, so 20% of your income is automatically deposited to a CD, high-yield savings, or investment accounts.
Create a Budget
There’s no fixed amount to save for retirement. The amount you save is dependent on your situation. First, calculate your current expenses and then your expected expenses in retirement. These figures can help you ascertain how much your monthly or annual retirement expenses would be, so you can know how much you need to save.
Set a Retirement Savings Goal
A more straightforward way to ascertain your retirement savings goal is to adopt “Rule 25,” which requires multiplying your annual expenses by 25. For instance, if your yearly expenses are $30,000, then you multiply it by 25. Meaning you’ll need a minimum of $750,000 for retirement. You can then use a retirement calculator to estimate how much you need to save each month from achieving your goal.
Identify Debt To Pay Off
If you have debts, then there’s a need to strategize on how to repay your debts. Start by paying off high-interest debts like credit cards and personal loans. Also, consider consolidating high-interest credit cards and other loans after comparing the interest rate offerings. Then you can move to pay off your student loans and mortgage debts.
Get 401(k) Match
If you have access to a 401(k) plan and your employer offers matching contributions, consider investing in getting the full match. Not taking advantage of matching contributions is like leaving free money on the table.
If you’re unemployed, a solo 401(k) account can provide the same benefit as a traditional 401(k). Also, consider an IRA to prepare for a seamless transitioning into retirement.
Contributing to an IRA
Paying off your debts doesn’t just improve your credit score but also provides you with more money to invest for retirement. If you want to lower your taxable income, then choose an IRA. Roth IRA allows you to make pre-taxed contributions and tax-free withdrawals in retirement. You can use an IRA calculator to determine how much you can contribute until retirement, bearing in mind the annual contribution limits.
Conclusively, making saving for retirement a priority is the ultimate strategy to achieve your financial goals in retirement. It’s also essential to start saving early and tackle your debts while building long-term wealth. Consider consulting with a financial advisor to make more informed decisions.