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How to save for retirement is an important question I receive all the time.

But here’s the thing: Most of the people I work with come to me with urgent debt problems. They are trying to get off the treadmill of paying high interest. They are also using credit cards and owing more each month than they bring in. In most cases, it makes sense to get your debt under control before you can think forward to retirement saving. But the earlier you start saving, the more you reap the benefits of compound interest.

Men and women are staying in the workforce longer, but they are also living longer, and the cost of living keeps going up. While working into your 70’s may be part of your goals, you should prepare for flexibility in your later years.

Even if you love your job, your priorities as you age could change. Maybe you want to spend more time with grandchildren. Your health could prevent you from working, or the job market shifts unexpectedly. It’s often harder to find work if you are let go in your 60’s and 70’s. And there is a good chance you could live into your 90’s or beyond.

I don’t say this to discourage you, but rather to show how important it is to have a retirement nest egg. It’s so easy to put off saving money because of your right-now spending, but even scarier is the very real prospect of coming to the end of your working years with few options.

How to Save for Retirement

How to Save for Retirement - Tammy LallyHow much you need to save varies person to person. Conservatively, you need to replace 70% to 80% of your pre-retirement income per year. More money set aside gives you more wiggle room. What type of lifestyle do you envision after you retire, what legacy do you want to leave, and how long are you willing to work?

Online calculators can give you a more personal assessment. However, saving 10-15% of your pretax income is a good place to start. More is always better, especially if you are starting later.

This article gives some guidelines on how much you should save for retirement at different ages. Fidelity suggests three times your salary saved at 40, and six times by 50. If you are close to retirement age, you can factor in payments from social security. As of now, you can begin collecting social security at age 62. The longer you can delay taking a payout, up to age 70, the more you can collect.

How to Start Saving for Retirement

What if you started late and setting aside 10% sounds impossible? A 2020 survey by TD Ameritrade found that 37% of Americans in their 50’s have less than $50,000 saved for retirement.

It is imperative that you Just. Get. Started!

If the recommended goals make you feel like you have failed at retirement saving, it can be easy to continue to ignore it.  Don’t relieve your guilt by putting your head in the sand. You will never regret having money put aside for your future. Also, because most Americans are behind with retirement savings, there are catch up’s allowed for contributions.

Start investing as much as you can now. You may be pleasantly surprised by how much your contribution is offset by saved taxes in your take-home pay.

Where Should I Save?

401K’s and IRA’s are retirement accounts that allow your money to grow tax free. If you have access to an employer 401K with any sort of match, begin there. Fund that account up to the match, and then concentrate on funding a personal IRA. For more about which IRA might be right for you, see my article here. If you max out your IRA contributions ($6000 per year or $7000 after age 50), and you are still able to save more, you should also put that money in your 401K.

A 401K has a much higher contribution cap ($19,500 in 2020) and makes it easy to automate your savings. Money to your 401K lowers your taxable income in the year you contribute, and often your employer will match some of that money.

However, you have limited choice in where your 401K money is invested. Your company chooses the investments and fee structure for the portfolio.

IRA’s give you flexibility to use pre-tax (traditional) or after-tax (Roth) money.  You can pick your investments, but your contributions are capped and income limits may apply.

Where Do I Find the Money to Invest?

If you are just getting started and you aren’t sure how you can carve out a percentage of your income, it’s time to take a hard look at your budget. Trace your expenses to see where you are sending your money each month.

Over the last 20 years, cost of living has exceeded income inflation, so that Americans are paying considerably more for housing and food while salaries are not much higher than they were in 2000. Many Americans cannot maintain the lifestyle they think they should. As a result, they rely on credit cards and jumbo mortgages to keep going.

While this type of spending is draining in the short-term, living on money you don’t have can be catastrophic when you look at your retirement years. How can you sustain a lifestyle you can’t afford when you can no longer borrow?

Setting “older-you” up for success is vital to your net worth, the health of your relationships, and your peace-of-mind.

Top things that always make it harder to save for retirement

It is very hard to save for retirement when all your income is going to pay off past purchases. Paying down high-interest debt should be your first step in retirement saving. You can save more efficiently by freeing up income than by trying to save a little on the side while paying your creditors’ minimum monthly payments.

If your debt is high or you just don’t have enough to set aside at the end of the month, you have two choices. You can either downsize your lifestyle or bring in more money. Or both.

Consider how you can comfortably live on your normal salary after that debt is paid off. Taking on an extra job may work in the short term to pay down debt, but you need a plan to slow your spending if you don’t want to work two jobs forever.

Also, you have to be disciplined about putting new money towards paying off old debt! It’s easy to allow “lifestyle creep” to take over instead. It’s so easy to want to reward all your hard work with extras, and forget you are doing the hard work because you already had the extras you couldn’t afford.

Saving for Retirement…for Your Family

If you have children, consider the example you are setting for them. Also, consider whether you want to have to ask them to support you in retirement.

Let me say that again.

Do you want to have to ask your children to help you in retirement?

You may think saving for your future is selfish when you want to spend on your kids and their sports and private school. But not being prepared to support yourself later is a preventable problem that will put a strain on the people you love.

It is a huge burden on young adults who are trying to make their own financial choices to know that their aging parents are struggling. Preparing for your own retirement provides an example to them while setting them up for success in their own lives.

As always, the Money Circle is free and here for you if you are trying to figure out your first steps towards a future where you no longer worry about money.

Tammy Lally

I BELIEVE MONEY IS NOT YOUR WORTH. Tammy Lally is an author, speaker, and Certified Money Coach (CMC). She helps others master their finances by first conquering their emotions around money, then by creating a comprehensive financial plan. She brings decades of experience and endless love to her bulletproof process for money mastery. She is the author of the book Money Detox, and her TED talk on Money Shame has over 2 million views.

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