Surrounded by a paradisal stretch of sand, green cliffs, and quaint mountains, you sit on the smooth sand, foot in water; a glass in hand. The sun graces your skin and the mystic powers of the beach suspend time. Breathtaking scenery…the life you envisioned all-time in active employment…
Hey there! You’ve got to snap out of your reverie. This scenario has touched a chord in the deep recess of your being, hasn’t it? Even though you are years away from retirement, pictures of how you desire to spend it would have formed in your mind’s eye over the years. How well you prepare for this stage of your life will determine the quality of your living.
‘Making hay while the sun shines’ is a statement that you should not joke with when you put your retirement plans in perspective. Millennials do not have the luxury of the pension scheme that baby boomers enjoyed during their earning years, and so are forced to make adequate plans for an enjoyable retirement. Experts submit that bidding farewell to gainful employment between the ages of 55 and 62 years can be termed as early since 65 is the age for retirement. How then do you save to retire early? How early should you start? How do you have enough cash to help you enjoy life after retirement and age gracefully? These questions and more will be addressed to help you focus on planning for retirement even as a millennial.
Invest savings that match your employer’s 401(k) plan
In the face of a fading pension scheme, 401(k) is the next best thing that has happened to employees. 401k is coined from the section of the tax code under which it was formulated. It is a pre-tax income saving retirement account, that lets you save towards retirement and enables your employer to contribute a certain percentage of your pre-tax income savings in it.
Simply put, the tax will not be deducted from the amount you save in it, you defer payment of tax till you withdraw the money. For instance, if you earn $5000 monthly ($60,000 yearly) and then decide to save 5% of your paycheck in a 401(k) which is $250 monthly or $3000 yearly, tax will be deducted on $57,000 and not $60,000 yearly or $4750 and not $5,000 monthly.
The juicer part of a 401(k) account is that your employer gets to contribute a matching amount to your personal savings. Who doesn’t care for some free cash? We all do!
Wait, before you get all giddy at this news of free money, there are principles (vesting schedules) that qualify you for this cash. Some companies require you to stay for stipulated years to benefit from this, else you lose contributions but get your savings. Not matching your employer’s contribution is letting free money pass you by.
Adjust your lifestyle to save more
Living large is a dream we tend to pursue, nothing beats the respect and comforts that luxury and affluence give us. In itself an extravagant lifestyle is good but sacrificing your savings at its altar will dismantle your plans to retire early. To save towards early retirement, you must spend less to save up more. Trimming your spending a little here and a little there will add up gradually to give you a robust savings account.
If you spend $15 five days of the week on eating out, you’d have spent $300 monthly and $3600 yearly. The decision to eat homemade on more days will have a chunk of your food expenses transferred into your savings. Cut out unnecessarily spending, learn some basic home skills like plumbing, gardening to reduce maintenance costs, resist the urge to buy things impulsively, get the best deals of products and services, stop unnecessary subscriptions, and make room for emergencies and miscellaneous expenses in your budget.
It’s okay to splurge on yourself occasionally, nonetheless, let your zest to save enough for early retirement bring you back on track once you have pampered yourself way beyond your budget.
Envisage future financial expenses
Change is the only constant thing in life, our career prospects, earnings and lifestyles are susceptible to change at any time. Your 20s and 30s will likely be the time when your career grows. As you earn more and climb the social and career ladder your taste will change, your outlook on things will take a new shape, and you will likely become responsible for the well-being of people other than yourself if you get married.
Now is the time to plan your earning years and evaluate the financial expenses you will incur futuristically. For the time being this may seem lame, but you will sooner realize that making plans for future expenses will help you access the would-be strength of your saving over the years and enable you to make career and economic choices that will place you on a better income which will financially secure your retirement age.
Inability to foresee future expenses and make corresponding plans will result in you working for long years to pay up these costs and saving enough for retirement.
Investing in bonds, annuities, and stocks
Letting your money work for you is a proven and tested way to save. Why should money lie fallow when there are several investment avenues they can be put in to yield dividend? This brings us to the need for you to invest in stock, bonds, and annuities. Your 401(K) plan yields interest over and over again for you because it is invested in bonds, stocks, and ETFs that your company chooses. However, returns on it can sometimes be low because employers may invest in low paying or risky portfolios. Having a separate investment independent of your 401(k) is key to earning and saving loads of money in view of retirement.
Stocks are the percentage purchase of ownership of a public company. Your investment increases when the company’s earnings increase. Stocks can be quite unpredictable and volatile, so seeking the services of a financial adviser is crucial to making the right choice.
Bonds are loans that you give so that your investment can be traded with. Yearly, your investment will attract interest and you get to receive your interest earnings and principal investment at a pre-decided maturation date.
On the other hand, annuities are life income investments purchased from insurance companies, and at retirement, you get a fixed income that spans over your remaining years. With annuities, you also can opt for either an after-death payout to your surviving spouse or choose a lump sum for them. These options have advantages and drawbacks; therefore, invest wisely based on your risk tolerance and goals.
Use a retirement calculator and automate your savings
Automating your savings into a savings account or Investment Retirement account (IRA) will save you the risk and temptation of spending your savings and deferring its payment. Since the money is deducted without your input, before your very eyes a neat pile of money will grow. As you save, use retirement calculators to evaluate how much money you will be getting at retirement from your 401(k) plan, IRA or Roth IRA, investment endeavors, and others. The web is replete with such calculators, pick anyone with good reviews.
Save and invest early
Deferring to save and invest for retirement to when you earn more and have achieved career leverage will do you more harm than good. Experts say there is no better time to save for retirement than in your 20s and 30s because your money has the potential to grow for longer periods and rake in interest over interest for you; this is called compound interest.
In your 20s and 30s, expenses are lower, and the length of years give you an edge over others who postpone saving because your savings will generate compound interest over the years. Also, you can open an Individual Retirement Account (IRA) in addition to your 401(k) and either opt for the traditional or Roth IRA.
Finally, the assertion that diversification is the spice of life rings true with saving towards an early retirement, exploring more than one option and starting early is important to achieving your goals.
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