It can be difficult to save the proper amount for retirement. Some pressing need always seems to take the place of your intended retirement contribution. Unexpected home or auto repairs, medical bills, education costs, that new outfit or gas grill... it is way too easy to find another use for your money.
The solution to this problem is simple: make your retirement savings a priority. Executing the solution is the tough part. Here are five tips to help you keep your collective savings needs in perspective and follow through with your savings plans.
1. Take Full Advantage of Employer Programs – Direct as much of your paycheck as you can reasonably afford into any employee retirement program. This is especially important when an employer match is present — not to take advantage of an employer match is essentially to turn down free money.
2. Make Saving a Family Tradition – Too many seniors willingly take on the debts of their children and grandchildren. Assumed student loans, help with housing, and other financial burdens take away from your retirement. If you take money from your retirement for these purposes, you have more limited time and options to recover financially than your children do. By establishing good savings habits with your children, you make it more likely that they will be able to stand on their own two feet financially.
We aren't suggesting that you should not help — we are saying that you must keep assistance in perspective, and lower the chances of your children needing assistance at all by teaching them sound financial principles.
3. Manage Debt Wisely – Spending on credit is fine, as long as it does not get out of control. As you start to carry a balance, your overall debt load is increased, and with credit cards, the debt generally carries a high interest rate. Try to limit credit card purchases to amounts that you can pay off at the end of the month.
As you budget each month, allocate money toward your retirement savings, then an emergency fund, and then address your bills. Pay at least the minimum on all bills and then focus on the highest interest rate debt that you have. Look over the lower interest rate bills and compare the return on your investments with the interest charges, and decide whether your money is better used paying down bills or contributing to retirement funds.
If you cannot even pay the minimum on all bills without dipping into retirement and emergency funds, reassess your spending.
4. Consider Housing Needs – For many people, a home is a reasonable, appreciable investment — but ask those who purchased immediately before the housing crash of 2007 to 2008 how they feel. Plan your down payment savings over the course of time, and don't funnel all of your savings toward a future home at the expense of retirement or emergency funds. It's important to load up retirement funds in the early years to take the greatest advantage of the time value of money.
If you have a home and are looking at upgrading or downsizing, consider your options with your overall debt in mind. Again, do not shortcut retirement savings to meet a housing goal. Consider buying a smaller, less expensive home or save for a longer time to make the switch.
5. Assess Retirement Needs – You don't know if you're on track if you don't have a target. Assess your retirement needs now and every so often to see if your goals have changed. Use the free MoneyTips Retirement Planner A crude rule of thumb is that you need 70% of your pre-retirement annual salary to live on in retirement, but that depends on your retirement goals, health, and a series of uncontrollable factors. Set an income target that gives you the proper level of comfort.
Next, assess your Social Security/pension income, expected income from other investments and assets, then see if your savings is on pace to fill in the remaining gap in income for your given life expectancy. Reassess every few years as your situation changes.
Don't wait until retirement is imminent to think about your post-employment financial goals and needs. Start now and establish the proper savings balance, and you are more likely to live comfortably in retirement without excessive sacrifices during your later working years.
The free MoneyTips Retirement Planner can help you calculate when you can retire without jeopardizing your lifestyle.