This is the first question that someone asked when I started the discussion about retirement savings. Most of us are unsure of how to start saving for retirement and how much we should stock up for a comfortable retirement. There are many factors that would influence the retirement savings amount, such as your current income, your monthly expenses, and your plans after retirement.
Investing in your retirement savings is simply circumstantial, and it depends on three things: time left for your retirement, how much you can save, and how much risk you can afford. There are many ways in which you can save better for your retirement. But before you start planning on your retirement savings, let’s figure out the answer to the question: “how much do I need to retire?”
Let’s get to the math!
The expert’s advice is that you should aim for replacing at least 70% (80 to 90% for a safer option) of what you’re earning now (pre-retirement income) through retirement savings and social security. In order to get the exact figure, you can use an online retirement savings calculator to do the math.
Now that you know how much you need to retire and have a comfortable retirement, it’s important to look for better ways to boost up your retirement savings fund.
3 ways to boost up your retirement fund:
A lot of people just stop at the point where they are yet to figure out “how much do I need to retire?” and the others stop at “how to reach those savings with this current income?”
It doesn’t matter how many years are left for your retirement or what is your current income, you can still find ways to boost up your retirement savings by following these 3 mentioned ways.
#1. Switch to smart saving option
One of the best ways to boost up your retirement savings is to make a smart investment. There are various options and you choose based on your risk tolerance. There are basically 2 killers that can spoil your investment plans, one obviously making a bad investment and the second is the fees. The first one is difficult to predict, but the second one depends on your choice of investment and the expense ratio.
For instance, let’s say if you invest $10,000 as an initial amount plus $5,000 per year for 30 years with returns 6% annually and has an expense ratio of 0.1%. At the end of 30 years, you will have $443,598, and for an expense ratio of 0.75%, you will have $389,240. And that leaves a difference of $54,358, which is a huge chunk. Higher the expense ratio, the lower the returns you get. So, switch to the smart saving option by choosing the investment based on the maintenance fee or expense ratio.
#2. Look for tax reduction wherever possible
Most of the retirement plans that your workplace offers, such as 401(k), 403(b), TSP, etc., comes with specific tax benefits that you can avail of. The traditional 401(k) plan comes with a benefit where your taxable income reduces by a dollar for every dollar you put into the account.
Thus, if you save $19,200 in a 401(k) account, then your taxable income will be reduced by $19,200. That implies you stock up all the money you put in and have a handful of savings. Simply, it means you don’t have to pay any taxes on the amount you save into the account that year until you withdraw it when you retire. There are other plans (Roth, IRA) as well where you pay taxes every year instead of paying it at the time of your retirement. You can learn about both the options and choose what suits your needs.
#3. Make use of the employer match fund
When you join a workplace, one of the things that wake up the thought of retirement savings is the 401(k) plan offered by your employer. The thing is that you won’t really see the difference when a part of your income goes to your 401(k) every month until you enjoy its benefits in your retirement. The additional incentive that comes along with 401(k) is the employer matching plan. In this, the employer makes a contribution to your account on top of your savings. For instance, if you put $3000 annually in your 401(k), then your employer would contribute $1500 additionally. This would help you to boost your retirement savings in the long run.
And now you would be able to calculate the answer to “how much do I need to retire?” Thus, you can easily move to the next step of boosting your retirement savings fund. One thing you need to remember is to add your retirement savings as a priority when you plan your monthly budget.