What should I be putting away?
Savings are a critical element of financial health. Without savings, a single emergency could wipe you out, to say nothing of retirement. As we grow older, we naturally tend to work less, and our finances need to be prepared to support us through that reality.
A lot of people look towards retirement and begin to wonder what it is they should actually be saving now to ensure a comfortable lifestyle later. General guidelines vary, but the short answer is the more you save the better off you’ll be. Some financial planners have been known to recommend you begin putting between 10-15% of your income into savings as early as your twenties.
The most specific general advice offered has been to save between $15-$20 for every dollar you expect to be missing from your pension to cover your expenses. This can sound confusing, so let’s look at an example:
If you know that your pension is only going to cover a certain amount of your expenses, and that $20,000/year will be left up to you to cover, you should be saving approximately $300,000-$400,000.
That being said, these general estimates only go so far. You know yourself and your lifestyle best, and it’s important to make a plan that’s as individual as you are. This will allow you to have a firm and specific understanding of what you need to be saving and how long it will take you to reach your financial goals.
Thankfully, there are a lot of resources that can help you check in with these goals. We recommend selecting a good online calculator to help sort out the specific figures you will want, and how much you need to save to get there. Update this estimation at least once a year, to ensure you’re on track and still planning effectively as your situation changes over time.
What should I aim for?
In terms of a target to aim for, you will likely want to have a savings that will enable you to receive between 70-90% of what you’re currently earning. This will enable you to live comfortably, covering your budget and still have a bit of wiggle room for surprises.
That being said, saving enough to pay yourself almost all of what you’re getting now, while still trying to run a household budget, can seem extremely daunting. Thankfully, you’re not on your own in this game. You can contribute to an investment with compound interest that will grow your nest egg faster than you ever could by yourself.
What is it you want to do when you retire? Do you want to sail around the world or merely visit a new state? Are you looking to take up five new hobbies or might one suffice? Whatever your goals are, having them laid out enables you to be specific in determining how much money you will need.
Budgeting now to have enough later
One of the most important steps in this process is going to be setting up a budget for your current expenses, savings, and spending patterns. You need to know where your money is going, where it should be going, and how to ensure it’s ready when you need it.
This budget then will need to also include a bi-weekly, possibly monthly, savings payment into your retirement account of choice. By automating this process, you can take out some of the temptation to hold on to the money rather than saving it later. Pretend the money doesn’t exist, that it’s just another household bill that needs to be paid, and you’ll be significantly better off.
A lot of consumers have debt to contend with, finding it ends up eating most of their paycheque before savings ever get a crack at it, and this is important to deal with. If you’re finding that most of your income is going towards paying off credit cards, you need to get those debts paid off.
Sit down and make a realistic plan to aggressively tackle your debts, and take control of your financial future.
Mortgages are a largely unavoidable part of life, both your biggest debt and your greatest asset. In times of low interest, don’t be afraid to refinance your mortgage. Refinancing can enable you to either pay off your mortgage quicker, or to pay the same amount (and give the difference to a retirement account instead).
Just make sure you’ve ditched the debt, since credit cards are a bigger drain on your finances than a mortgage likely ever will be.
Another thing to keep in mind is paying off the mortgage, the quicker you can do this, the better. If you already own your home by the time retirement reaches you, that’s a huge amount of money you’ve budgeted for (in terms of the mortgage expense) that you can now keep for savings or other life plans.
With this line of thinking in mind, try to avoid mortgaging the house more than once. This will bury you in real estate debt, and often doesn’t help you get out of trouble, unless you have really changed both your thinking about money and your spending habits.
Saving options for pension
There are several different types of retirement savings accounts. Each has its own set of advantages and disadvantages, but all offer at least some form of assistance in growing your nest egg for your future.
It is worth noting that these plans can be indulged in by small businesses and self employed individuals as well, access is not restricted to bigger companies.
Comparison shopping for low account fees
Account fees are always going to be present on retirement accounts. The founder of Vanguard Investment Firms, John Bogle, has gone on record as saying that the companies like his make at least half a trillion dollars per year – before the market grows or falls. So where is that coming from? Account fees.
While it’s true that most (if not all) accounts have fees for maintenance, it is also true that we live in a competitive financial market where banks will compete for your business by offering lower fees from time to time. The lower your fees are, the higher your earnings remain!
Don’t think the fees are that bad? Consider this example: If you were to invest $10,000 in an account that earned 8% interest and only charged a 1% fee per year, in twenty five years you’d have spent $16,000 maintaining that account.
You may not be able to avoid fees entirely, but don’t be afraid to do a little comparison shopping. Maybe adviser A doesn’t charge transaction fees, or adviser B charges extra ones. The bottom line is to be aware of these fees, and to balance them against the expertise of your adviser.
If you trust the person you’re with and their fees seem reasonable, you likely have no cause to switch accounts over. Just be sure you’re not getting raked over the coals any more than you need to be with transaction fees or other hidden retirement account charges.
Diversifying your investments
You know the old adage “don’t put all of your eggs in one basket”? Well, that advice is practically gold in the financial world of retirement savings. You’ll hear it from your financial adviser, you’ll hear it from economists, and banks will sing the same tune as well! When you’re investing, it’s hard to imagine a scenario that wouldn’t benefit from a little more diversification.
The alternative, to invest heavily in a single form of savings, can result in bigger payoffs – but also bigger losses. If your one investment goes under, your entire savings could easily be gone. This is why diversification is such an important facet of the retirement planning process, the more eggs you have out there, the more likely you will be to have a hatched chick (or appropriate nest egg) when you’re ready to retire.
So how should you diversify?
Experts typically recommend a combination of risk levels of investment. Higher risk investments, like stocks, have the potential to pay out higher than their more conservative options. Unfortunately, they also have the opportunity to provide heavier losses, but this is where balancing your portfolio out with some conservative investments come in. Lower risk investments (like bonds) may make lower typical dividends, but they are reliable and relatively low risk.
In terms of determining the balance between high and low risk investments, many experts recommend you consult your age. Why? Because the further on in years you get, the sooner you are guaranteed to be drawing on your funds, and thus the less risk you can afford to take.
In addition to striking a balance between stocks and bonds, you should also never be afraid to investigate other investment opportunities. Telecommunications, pharmaceuticals, and even real estate can all be forms of investment worth investigating.
Don’t be afraid to work a little longer
If you like what you’re doing and it’s paying you well, why should you retire the moment you hit 65? More and more people are electing to remain in the work force. While this can be extremely frustrating at first, consider what this does for your savings accounts.
Do the numbers on working for just three more years, and see if you won’t be more motivated to stay!
Don’t think you can handle working the same hours you used to? Consider scaling back your hours at work, and see about the flexibility of your workplace in supporting your slower departure. You’ll still be drawing an income and giving your money time to grow, all while gaining the free time that so many have looked forward to.
Keep a workable, revised budget throughout retirement
Even if you’ve worked hard and saved for years, it can be all too easy to squander your hard earned nest egg. Set up a budget for retirement, and try to stick to it. By this point in your life you’re likely an absolute expert on setting realistic goals and budgets, so why not continue to let these concepts work for you.