Retirement savings advice from a CFP that helps people retire early


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Saving for retirement is sometimes pushed back in our heads, especially when we’re younger and think that we really, really have a lot of time before having to think about our golden years.

However, saving for retirement means securing an income to live on when you’re older and no longer working. There are a few things we should really keep in mind to help us prepare properly.

So Select asked Michael Powers, Certified Financial Planner and Founder of Manuka Financial, for his best advice on saving for retirement. His financial planning firm specializes in helping people retire early, however his advice applies to everyone, whether or not they want to retire at the traditional age.

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Pay yourself first and automate your savings

According to Powers, you can start building a solid retirement nest egg by getting into the habit of pay you first. Paying Yourself First is a strategy where you save a portion of your income before spending anything, rather than spending first and then saving what’s left. And, paying you first goes hand in hand with another of Powers’ biggest retirement savings tips: automating what you save.

When you spend first and only save what’s left, you run the risk of overspending and not leaving much room to save. Your employer’s 401 (k) plan can actually help you pay yourself first and automate your retirement savings since the money is taken from your paycheck before it even reaches your checking account. This way, you don’t even have the option of spending the money.

“It’s important to pay yourself first and automate your savings,” he said. “It’s much easier to set aside 10% or 20% [of your paycheck] before you even have the chance to spend it. The more you automate your savings, the better. And don’t forget to make full use of your correspondence with the employer. So if they match dollar for dollar on the first 4%, get that match in order to get 100% ROI. ”

But if you don’t have an employer sponsored 401 (k) account, you can still use an IRA or Roth IRA account to save for your retirement. The only differences are that you have to create an IRA yourself, but it only takes a few minutes if you open the account online through an investment platform like Fidelity or with a robo-advisor like Betterment. While you may not be able to automatically transfer part of your salary to one of these retirement accounts, you can still plan to contribute a set amount each month as soon as you get paid.

Calculate how much money you will need to fund your retirement

Knowing your retirement number – that is, how much money you’ll need to keep you afloat when you’re off work – can make a difference to how you save. A 2019 report from the The Department of Labor explained that only 40% of Americans have calculated how much money they will need for retirement. And when you don’t know how much money you’ll need, you risk not saving enough and running the risk of outliving your retirement funds.

Whether you plan to retire early or retire at the traditional age, it is essential to calculate how much money you will need to complete your retirement. Powers uses the 4% rule to help clients calculate what their retirement number would be.

“The 4% rule is this idea that over most historical 30-year periods it has been found that you can withdraw 4% of your total investments each year and the money should last you for at least 30 years,” Powers said. “So it’s a good rule of thumb to start calculating how much you’ll need to save before you retire.”

However, he also says that you should consider the lifestyle you want in retirement and adjust the 4% rule accordingly. For example, if you want to retire early, you may need to live on just 3.5% of your investments each year instead of 4% to make the money last longer. Or, if you want to travel a lot in retirement, you might end up withdrawing 5% of your money instead.

Now that you know why you should consider a 4% annual retirement withdrawal, it’s time to use this rule to determine how much you should save before you retire.

According to Powers, you can calculate this number by estimating what your total annual expenses would be in retirement, then subtracting how much you expect to receive from sources of income you expect to earn in retirement, like Social Security distributions and income. rent. goods. What is left is the amount of money you will need to withdraw from your savings and investments each year in order to cover all of your expenses. Multiply that number by 25 (or you can divide it by 0.04) and you will be left with the amount of money you need to have saved before you can comfortably retire.

So let’s say you think you will spend $ 50,000 per year in retirement and expect to receive $ 26,000 per year in Social Security income – $ 50,000 minus $ 26,000 leaves you with $ 24,000, which is the amount you will need to withdraw from your investments each year. in order to fully cover your expenses. Now, $ 24,000 multiplied by 25 gives you $ 600,000, so you will need a total of $ 600,000 when you retire.

The earlier you start, the better

Start to Saving for retirement as early as possible gives your money more time to grow. One of the most important things about investing is time. And those who start investing earlier may actually contribute less money each month toward their goal, whereas someone who starts even 10 years later should invest a lot more each month toward the same goal.

“The sooner the better,” Powers said. “You want the magic of compound interest to be on your side, so the sooner you can start saving something, the easier it will be. If your account balance grows at a rate of 7% per year on average, that will double every 10 years or so thanks to compound interest.

Of course, not everyone ends up with an employer sponsored 401 (k) account immediately after college. But you can still open a Roth IRA or Traditional IRA yourself and start contributing to those accounts in the meantime.

Make room to enjoy your money

And while saving hundreds of thousands, if not millions, of dollars for retirement can seem daunting, it’s important to make room to continue enjoying the money you work for. Saving for retirement doesn’t mean you have to squat down and hang out with friends or avoid spending on travel. Finding the right balance between saving for your financial goals and spending what you love can help you avoid financial fatigue.

“Remember that life is a balance,” said Powers. “Balance living for today while saving for tomorrow, because we don’t know if tomorrow will come, so you don’t want to miss out on enjoying life for a day that may never come.”

Correction: This article has been updated to reflect the following: The amount of money you will need to withdraw from your savings and investments each year to cover all of your expenses in retirement should be multiplied by 25 or divided by 0.04 to determine how you will need to save to comfortably retire.

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Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.


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