You don't have to be a millionaire now to be a millionaire at retirement. Find out the secrets behind retiring rich.
The median worker’s retirement fund contained a meager $79,300 in 2010. That fun fact comes courtesy of professional services firm Towers Watson and might make you think retiring rich is out of reach for most people.
Don’t let the statistics scare you. With a little advance planning and self-discipline, you might not ever be famous but you could be rich.
Follow these rules:
Rule 1: Spend less than you earn
The formula for retiring rich starts with you actually putting money in the bank. Social Security alone isn’t enough to have you living the good life during your golden years.
Stacy recommends you spend only 90 percent of the money you make and sock the remaining 10 percent away.
If you have zero savings right now, concentrate on building up an emergency fund in a savings account first. Once your rainy-day fund is full, put that 10 percent you’re not spending into a dedicated retirement fund.
If you’re currently spending more than 90 percent of your income each month, you may want to read about how to save $1,000 by summer.
Rule 2: Start saving early
Thanks to the power of compounding interest, a little money saved now can go a long way at retirement time. But to get the most benefit, you’ll want to start saving as early as possible.
Let’s say you’re 20 years old and can manage to put away only $100 a month into your retirement fund. Assuming you average 8 percent returns, you’ll be closing in on having half a million dollars — $463,806 to be exact — by age 65. Even better, over that 45-year period, you’ll only have invested $54,000 of your money to get all that cash in return.
If you wait until you’re 40 to start saving $100 a month, you’ll put in $30,000 of your money and get $87,727 in return by age 65. Not bad, but wouldn’t you rather have half a million?
Rule 3: If you start late, make up for lost time
Maybe you’re age 55 and think you’ve missed your window of opportunity to retire rich. Don’t raise the white flag just yet!
The government allows those 50 or older at the end of the year to make catch-up contributions to their retirement funds. You can contribute an extra $5,500 to your workplace retirement program, such as a 401(k), for a total annual contribution of $23,000. IRA catch-up contributions are $1,000 for a total allowable contribution of $6,500 each year.
You might think there’s no way you’d ever have $6,500, let alone $23,000, to invest in a single year, but you may be surprised at when and how you come into extra cash. You may benefit from a loved one’s estate, downsize your home or sell your boat or other large toy that no longer fits your lifestyle. When you find yourself on the receiving end of a windfall, don’t blow it on a vacation; put it in a retirement account if you want to retire rich.
Rule 4: Don’t leave free money on the table
If someone tried to hand you $100, would you say no?
That’s exactly what you’re doing when you fail to take advantage of a 401(k) employer match. Your company is basically giving you free money with the only string being you need to pony up some of your own cash for the retirement fund too.
You won’t get rich by passing up golden opportunities like this for extra cash. If your employer offers a 401(k) match, make sure you are taking full advantage of it.
Rule 5: Minimize your taxes
The rich stay rich, in part, because they’re savvy enough not to let Uncle Sam take too much of their money.
When you’re investing your retirement money, be sure to use tax-sheltered accounts such as IRAs and 401(k)’s whenever possible. In addition, be smart about which type of account you use.
Traditional retirement accounts let you invest money tax-free now and then pay the piper once you make withdrawals in retirement. Meanwhile, Roth IRAs and Roth 401(k)’s tax you now and make the withdrawals tax-free.
You’ll probably want to discuss with a financial adviser the best option for your particular situation, but generally, Roth accounts are preferable for younger investors. In theory, you should be making more when you’re 65 than when you’re 25. As a result, your tax rate now may be lower than the rate you’d pay at retirement. However, if you’re within a few years of retirement, you may want to consider a traditional account to get the tax benefits now.
Rule 6: Take a little risk
You could put all your money in bonds and sleep well at night knowing you’ll probably never lose any of your money. But with that approach, you’re not going to retire a millionaire either.
Stocks and real estate are where the money is to be made, but then there is always the risk of a housing bubble bursting or the market crashing. Take heart, though, in knowing that stocks and real estate have historically appreciated in the long run.
Rule 7: Stay informed about your investments
Don’t mistake taking a risk with being dumb.
A smart risk may be investing in an emerging market fund. A dumb move may be pouring your life savings into a speculative currency.
How do you know the difference? By researching available investments, weighing your options and selecting the amount of risk that works for your unique situation. For example, those nearing retirement age may want to minimize their level of risk, while recent college grads can be more daring because time is on their side.
Rule 8: Break free from the herd
When the stock market crashed a few years ago, too many people freaked out and sold their investments.
You know what? Those people took a bad situation and made it even worse. Many sold their investments right when the market was bottoming out and then they missed the rebound.
The people who are going to retire rich are those who snatched up stocks at bargain-basement prices in 2009 and then saw their value climb by double digits in the following years. Same thing goes with the housing market. When the bubble burst, the smart people were the ones who were buying houses, not selling.
It’s easy to follow the herd, but if you want to be rich, you need to keep a cool head and make rational money decisions even in the midst of a crisis.
Rule 9: Work longer
Or at least wait to file for Social Security. While you can file for Social Security benefits as early as age 62, you’ll get a lot more money if you wait until you’re 70.
Once you hit your full retirement age, you can get an 8 percent bump in your benefits for every year you wait to start receiving payments. However, you’ll want to file by age 70 because there is no benefit to waiting longer than that.
You may be worried you’ll have one foot in the grave at age 70, but don’t fret. According to Social Security actuarial data, at age 70, you should still have an average of 14 to 16 years left to suck all the marrow out of life.
Rule 10: Maximize your income potential
Finally, if you want to retire rich, you need to maximize your earnings. That means no more settling for a dead-end job that pays pennies.
Look for ways to increase your income, which can, in turn, increase the amount of money you are saving for retirement. Consider these options:
- Does your current field offer some form of credentialing that could increase your opportunities for a raise or a transfer to a higher-paying position?
- Is there someone in your workplace who could serve as a mentor and help advance your career?
- Are you eligible for one of the government-funded workforce development training programs?
- Did you start a college program and never finish it? Will those credits transfer?
- Could you use an online degree program or vocational classes through a community college to earn a degree or upgrade your skills?
Regardless of which option you choose, don’t fall into the student loan trap. If you do decide to go back to school, look for ways to make college affordable and try to pay as you go rather than going into debt.
Retiring rich may sound like something reserved for the one-percenters, but by making these smart money moves, you too can have plenty of cash to carry you through your golden years.
What’s your saving strategy? Share with us in comments below or on our Facebook page.