Think Hard About Your Future Plans
One huge challenge all small business owners face when saving for retirement is the specter of the unknown. You cant predict how long youll live, whether youll face financial challenges or medical issues, or any number of other factors. So, youre working with an educated guess. You dont want to set aside so much that it hobbles your life and business growth today, but you certainly dont want to run short once youre retired.
To make your educated guess, start thinking about what your retirement is going to look like. Do you expect to work for as long as possible or retire early? Will you downsize your home, retire somewhere with a lower cost of living, or buy a vacation home? Will you be supporting a spouse or other family member? Will you have alternative sources of income such as an investment account?
Consider also what you want to do in your retirement. For example, maybe youll want to travel. Maybe youll want to take up sailing or golf. All of those hobbies cost money and youll need to make sure you have enough on hand. On the other hand, you may want to take up part time work doing something you enjoy teaching a class or two at your local college, for example. Then you can factor that additional income into your plans.
With that information, you can start to get a ballpark estimate for how much money youll need once you leave the office behind.
Adjust Your Target Based On Three Important Variables
The truth is that there can never be a one-size-fits-all standard because the trio of primary variables is different for everyone.
How much money you need in an emergency fund depends on three factors, said Spark Rental founder Brian Davis, who helps his clients build financial security through real estate investing. Your job security, the stability of your income, and the stability of your expenses. A government bureaucrat with virtually bulletproof job security doesnt need as much saved as a tech worker at a startup. Likewise, that bureaucrat has a stable W-2 paycheck that arrives every two weeks, whereas an entrepreneur or self-employed person might see their income fluctuate from nothing up to five digits from month to month.
David added, Theres no magic formula to calculate exactly how much you need. But even the most secure, stable earner should have at least two months expenses set aside. If you work for yourself, aim for at least six to 12 months expenses.
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Set Up Automatic Transfers To Your Retirement Accounts
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Set Up Automatic Recurring Deposits
Most financial advisors recommend you set up a regular cadence of deposits into your retirement accounts, whether thats through a workplace 401 or in an IRA. If youre using a 401 at work, youre probably already set. If youre investing with an IRA, make sure youre making regular deposits that wont exceed the annual limits.
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Not only does this keep you from having to take the time and energy to buy investments every month or week, but it also prevents you from spending money youd rather save. It also may help you pay less per share on average, thanks to a powerful principle called dollar-cost averaging.
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Take Advantage Of Catch Up Savings
Catch-up contributions are congresss way of making it easier for savers age 50 and up to tuck away enough retirement savings.
You probably already know that theres a limit to how much youre allowed to save in tax-advantaged retirement account such as IRAs and 401s. Well, once you reach age 50, youre allowed to make additional catch up contributions over and above those annual contribution limits.
However, according to a Transamerica Center study, only 52% of workers know about catch-up contributions.
Time to learn about catch-up savings and start stashing away more money.
Start Your Own Business
Having a job and saving for retirement at 50 can be challenging. But it is possible. You need to understand the suitable options.
First, consider your current financial situation. Then, if you need to be in a better place, you should seek advice from a financial professional. Theyll charge you a fee and help you develop a sound investment strategy.
Second, consider your budget. Depending on your needs, you can start a new business on a small budget. You dont need to rent a fancy office or invest in expensive supplies.
Finally, consider your objectives. Some people may prefer to live below their means in their early years. Others may want to spend their golden years traveling the world.
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Put Your Money Where You Cant Touch It
If youre uncomfortable with the idea of contributing to an IRA, where youd be penalized for removing money before age 59.5, then consider a shorter term option for investing your money. One option would be to place some savings into a Certificate of Deposit for a few months or years. A CD is a type of savings account that has a fixed interest rate and fixed date of withdrawal. There really isnt any risk with a CD , 403 or IRA) and they are insured by the FDIC up to $250,000 per depositor.
You cant remove funds without a penalty, but you can choose how long youre comfortable investing your money for. However, the longer the term length, the higher the interest rate youll earn. This is a great solution for people who anticipate they may have to dip into savings when their children go to college or when they want to buy a house.
Open An Additional Retirement Account
There are plenty of reasons to have more than one or even two retirement accounts. You might consider opening additional retirement accounts if your employer-sponsored plan charges excessively high fees or you dont like the investment options it provides.
If youve been on top of your savings game this year, you might open another retirement account if youve hit annual contribution limits on your main account. Consider opening a traditional IRA or a Roth IRA , and set aside another $6,000 for retirementor $7,000 if youre 50 or older.
Account options become more limited once youve maxed out your annual IRA contributions. If you have a side hustle, take a look at an SEP IRA or Solo 401 to invest some of your earnings. Just remember, while you can have multiple IRAs and 401s accounts, annual contribution limits count across all accounts.
And if youre a really good retirement saver and youve exhausted your tax-advantaged retirement account options, invest in a taxable brokerage account. While they lack the favorable tax treatment of many retirement accounts, theyre still a very useful tool to keep investing for retirement.
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The Boring Glory Of Index Funds
Your best bet is to buy something called an index fund and keep it forever. Index funds buy every stock or bond in a particular category or market. The advantage is that you know youll be capturing all of the returns available in, say, big American stocks or bonds in emerging markets.
And yes, buying index funds is boring: You usually wont see enormous day-to-day swings in prices the same way you may if you owned Apple stock. But those big swings come with powerful feelings of greed, fear and regret, and those feelings may cause you to buy or sell your investments at the worst possible time. So best to avoid the emotional tumult by touching your investments
Monitor Your Retirement Plan
Regularly checking in on your retirement plan will help ensure its still in line with your long term goals. Regulations, fees, commissions and more can be subject to change. Its also possible that your portfolio allocation may shift over time as certain investments grow.
Plus, you might find youd prefer to alter your portfolio contributions depending on market conditions or your own budget. Whatever the scenario, staying in the know when it comes to your retirement plan will put you in a stronger position.
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What Investments Accounts Should You Use
Setting aside a certain amount of money every month is, of course, the most critical part of retirement savings. But you won’t reach your goal without putting that money into the market. One reason to invest is because you want to take advantage of the power of compounding, which is when gains grow on top of other gains. For instance, if you invest $100 in one year and it goes to $110 the next, your next year’s gains will be on top of the $110, not the original amount you put in. Over time, that compound growth can really boost returns. No matter what account you use, your investments will compound year after year.
How much you can save and what tax you may have to eventually pay, though, does change depending on the account.
What Is A Roth Ira
The Roth IRA isnt just an alternative retirement plan. Its one of the best retirement plans available!
IRA stands for Individual Retirement Arrangement . IRAs work like your standard workplace 401without employer contributions, of course. You can contribute a set amount of your annual income to your Roth IRA. And you can even set up automatic contributions, just like with a 401.
You can invest in all kinds of things through your Roth IRA, but good growth stock mutual funds are your best bet for building long-term wealth.
Why are we such big fans of Roth IRAs? Short answer: taxes. With a traditional IRA, your money grows tax-deferred, so youll pay taxes when you withdraw it in retirement. In a Roth IRA, you pay taxes up front when you contribute, which means your money grows tax-free and you can withdraw it tax-free in retirement .
We consider the Roth IRA the rock star of retirement accounts! The plan is available to pretty much everyone , making it a huge part of your retirement investing plan.
Besides the missing employer match, the biggest difference between a 401 and a Roth IRA is the Roth IRA has a lower contribution limit than a 401.
Before we get into how to open a Roth IRA, we need to hit the brakes and ask, are you ready to invest for retirement?
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Find Out How Much Money You May Need In Retirement
Here’s how you do it: Use our Retirement Wellness Planner, a tool that gives a quick snapshot of how much income you may need in retirement. It also helps identify a surplus or gap.
Just plug in your current annual income, how often youre paid, your pre-tax contribution to your retirement account , current retirement savings, estimated Social Security benefit, current age, and desired retirement age. You can adjust your deferral to see how the numbers change.
This is also when a financial professional can be a big help if you want a customized plan for retirement. To learn more, read how to choose and work with a financial professional.
What Should My Risk Tolerance Be
If youre in your 20s or 30s, then youve got a long way to go before youre going to need your retirement savings. As such, you should have a very high tolerance for risk. Even if the market takes a dive , youll have plenty of time for the market to recover.
What if it never recovers, you ask? All I can say is that, should the global financial system collapse, well all have bigger problems than our retirement accounts like finding fresh water and shelter from the zombie hordes.
So, until the zombies come, you should focus on investing in stocks, which carry the highest risk but also offer the greatest rewards. As you get older, into your 40s or 50s, youll want to move your money out of stocks and into safer assets, like bonds. But for now, you want to maximize your market exposure so you can maximize your returns.
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What About International Etfs To Generate Retirement Income
I think international markets are best owned via growth ETFs vs. dividend ETFs due to mainly the lower cost structure involved.
These are my top-3 favourite international ETFs to own:
How Much Money Will You Need To Retire
When clients ask Dan Tobias, CEO and certified financial planner at Passport Wealth Management in the Charlotte, North Carolina area, how much theyll need to retire, hes quick to redirect the question by asking what retirement looks like for them.
Are they looking to drive a Lamborghini, or are they looking to move to a 55-plus type condo in Florida? Tobias asks.
After Tobias understands the persons retirement vision, he can apply certain rules of thumb. One is seeing what 4 or 5 percent of your retirement savings is using the classic 4 percent rule and what your lifestyle would be living off that amount. If that number isnt on target, youll have to either increase your contributions or live more frugally during retirement.
To gauge whether youre saving enough, Fidelity Investments recommends certain levels of retirement savings as you age.
- For instance, at age 30 you should have at least your annual salary saved.
- At age 50, you should have six times what you earn annually saved for retirement.
Some advisors have different estimates: Bank of America estimated middle-income earners would need to save 8.2 times their salary by the time theyre in their early 60s in order to confidently replace their income.
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Saving Tip #: Get Rid Of Any Debts
The Retirement in America study found that almost one-third of savers who are in debt ranked credit card debt as a top reason they dont save more for retirement.10
Debt isnt just borrowing money you dont have from the bank. Its also borrowing from your future! Every dollar that goes to a debt payment is a dollar you could have invested. If you want to be serious about saving for the future, debt has got to go. Knock out your debt using the debt snowball method.
We talked to thousands of millionaires to find out how they built wealth and what it takes to retire as a millionaire. And guess what? Not one of them ever said they got rich from their rewards points. The majority have never had a credit card balance in their lives and most of them never took out a student loan.
Why? Because millionaires know that debt will hold you back and prevent you from reaching your financial goals. Stay away!
How To Save For Retirement
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The best way to save for retirement is in a retirement savings account.
Were not trying to be cheeky. Just super literal.
These accounts are some of the best deals going: Unlike regular investment accounts, they give you a tax break on your savings, either upfront or down the road when you withdraw funds. And in between, your investments are shielded from the IRS and grow without being taxed.
So when were asked how to save for retirement, our answer is to take full advantage of the retirement savings accounts available to you whether you’re a traditional worker or self-employed.
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