Retiring comfortably — never mind wealthy — may seem out of reach to many people, given current savings rates and inflation.
But don’t let those fears scare you. With a little advance planning and self-discipline, you can have a golden nest egg at retirement. Here is a step-by-step plan for getting there.
1. Spend less than you earn
The formula for retiring rich starts with actually putting money in the bank. Social Security benefits alone won’t be enough to have you living the good life during your golden years.
If you have zero savings right now, concentrate on building up an emergency fund in a savings account, perhaps by setting aside 10% of each paycheck. Go to our Solutions Center to find a savings account paying a great rate. Then, once your rainy-day fund is full, put that 10% you haven’t been spending into a dedicated retirement fund.
2. Start saving early
Thanks to the power of compounding interest, a little money saved now can go a long way at retirement time.
Compound interest is interest that’s earned and added to an account balance so that the interest, too, then earns interest. Compounding speeds up your earnings because, as your account balance grows, each new interest payment is based on a larger amount.
To get the most benefit from compounding, you must start saving as early as possible. The younger you are when you start saving, the richer you are likely to get.
3. If you start late, make up for lost time
Maybe you’re 55 and think you’ve missed the window of opportunity to retire rich. Don’t wave 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. For 2022, you can contribute an extra $6,500 to your workplace retirement program, such as a 401(k) plan, for a total annual contribution of $27,000. IRA catch-up contributions can be $1,000, for a total allowable annual contribution of $7,000.
You might think there’s no way you’d ever have that kind of cash to invest in a single year, but you could be surprised at when and how you come into extra cash. You may benefit from a loved one’s estate, downsizing your home or selling a 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. Instead, put it in a retirement account if you want to retire rich.
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 attached being that you also need to pony up some of your own cash for the retirement fund.
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.
5. Minimize your taxes
The rich stay rich because they’re savvy enough not to let Uncle Sam take too much of their money.
When investing your retirement money, use tax-sheltered accounts such as IRAs and 401(k) plans whenever possible. In addition, be smart about which type of account you use.
Traditional retirement accounts let you invest money tax-free now and pay the piper once you make withdrawals in retirement. Meanwhile, Roth IRAs and Roth 401(k) plans will tax you now, but you’ll get to make withdrawals tax-free later on.
Discuss with a financial adviser the best option for your particular situation. For more tips, check out “How Do I Find a Good Financial Adviser?”
6. Take a little risk
You could put all your money in bonds and sleep well at night knowing you’ll probably never lose 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. Yes, there is always the risk of a housing bubble bursting or the market crashing. But take heart in knowing that stocks and real estate historically have appreciated in the long run.
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.
8. Break free from the herd
When the stock market crashed amid the coronavirus pandemic, some people likely freaked out and sold their investments.
You know what? Those people took a bad situation and made it even worse. They sold their investments right when the market was bottoming out, and then missed the surprise — and massive — rebound that began soon after.
The people who are going to retire rich are those who saw an opportunity to snatch up stocks at bargain-basement prices.
The same thing goes with the housing market. When the bubble burst a decade ago, 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.
9. Work longer
Work longer, or at least wait a few years 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 in those monthly checks if you wait to start until you’re 70.
Once you hit your full retirement age, you can get an 8% 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.
Just remember that waiting to claim does not make sense for everybody. For more on why you might not want to wait, read “5 Times When It’s Smart to Claim Social Security Early.”
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.