For most workers, saving up for retirement isn’t a priority. After all, there’s always time to save up later. As of 2012, 30% of employees claimed to have less than $1000 in total savings. The problem is that over half of retirees today were forced into retirement due to unforeseen circumstances such as company layoffs, disability, illness, and more.
Even those who do recognize the importance of retirement savings often fail to save enough because they prioritized other, more immediate expenses. More than 25% make use of their 401(k) savings before they enter retirement age to pay off mortgages, bills, and even their children’s college tuition expenses.
Importance of Retirement Savings
There are two main reasons why saving up for retirement is important.
First of all, it spells financial independence for the retiree. The usual expenses still apply: home maintenance, groceries, and utilities. Saving up means you’ll have a sufficient nest egg to get by on your own (plus pension) and won’t have to rely on others.
Second, medical expenses can rack up easily, even with health insurance. For a couple of 65-year-old retirees, the total cost of medical expenses is approximately $240,000 as of 2012.
Strategies for Saving
The problem is that motivating the self to save up for something that seems far and away can be difficult. The returns are not immediate, so it can be a matter of mastering the right saving strategies.
Take note of these five useful techniques:
1.) Choose the right savings account or investment plan. The most common is the 401(k), and it’s important to start with your employer first. Most companies offer employee benefits that include retirement savings plans. Some employers even offer to match your retirement contributions, which can be a very helpful step in increasing your overall savings.
If you do not think the 401(k) is enough, you can always look to other investment instruments. Mutual funds, for example, can be very helpful in helping you invest without having to deal with the usual difficulties of maintaining a stock portfolio on your own.
2.) Pay yourself first. This is one of the most important strategies for saving. The usual problem for most employees is that they pay off their bills and buy the things they want first before setting aside an amount to save. But in doing so, it becomes difficult to save as more often than not there is no money left over.
In paying yourself “first”, it simply means that you should set aside an amount for your savings account before anything else. Treat it as a “bill” you have to pay like your other monthly expenses.
3.) Start with a small amount. Most employees say they can’t save because they don’t have enough money left over. There is no minimum amount to your savings. Start small. What is important is that you start saving early. Compound interest can make even the smallest amount grow substantially.
1% of your net income is a fair amount to start with. You can increase this amount over time, at a pace comfortable to your financial situation.
4.) Save your windfall. Employees earn substantial bonuses and occasional windfall amounts like tax returns. Instead of spending the money, develop the discipline to send these windfall earnings to your retirement savings immediately.
5.) Take advantage of catch up contributions. If you’re 50 years and above and you think you haven’t saved up enough for retirement, take advantage of the catch up contribution system set up by the Internal Revenue Service (IRS).
Employees within this age range are allowed to add $1000 more to the maximum annual contribution to help bulk up their total retirement savings.
What retirement saving strategies are you using? Share them with us!