Retiring comfortably — never mind wealthy — may seem out of reach to many people, given current savings rates.
But don’t let those statistics scare you. With a little advance planning and self-discipline, you can have a golden nest egg at retirement. Here is a 10-step plan for getting there.
Rule 1: Spend less than you earn
The formula for retiring rich starts with you 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 percent 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 percent you haven’t been spending into a dedicated retirement fund.
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 have around $500,000 by age 65. Even better, because of compound interest, 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, and get that same rate of return, you’ll put in $30,000 of your money and you’ll have in the ballpark of $100,000 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 55 and think you’ve missed your 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 2019, you can contribute an extra $6,000 to your workplace retirement program, such as a 401(k), for a total annual contribution of $25,000. IRA catch-up contributions can be $1,000, for a total allowable 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, downsize your home or sell 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.
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 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.
Rule 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, be sure to 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 tax you now, but you 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 “2-Minute Money Manager: How Do I Find a Good Financial Adviser?”
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 in knowing that stocks and real estate historically have 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 saw an opportunity to snatch up stocks at bargain-basement prices in 2009, 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. Keep that in mind if the recent stock market volatility continues.
Rule 9: 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 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.
Just remember that waiting to file does not make sense for everybody. For more, read “Ask Stacy: Should I Wait Until 70 for Social Security?”
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.
How’s your retirement saving going? Share with us in comments or on our Facebook page.
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