Saving Money for Retirement — 6 Steps to Peace of Mind

by Neal Frankle, CFP ®

You already know how crucial it is to be saving money for retirement – no matter what stage of life you’re in. Here are 6 steps to help you do just that:

 

Saving Money For Retirement

 

1. The Plan

Lots of people assume that spending is the most important element for retirement success. Not so. If you want to have enough money for retirement, you have to understand the relationship between your retirement investments and assets, retirement income and retirement spending.

Example. Assume you’ll have $150,000 saved up by the time you want to retire. If you’re lucky, you’ll be able to earn 5% on that $150,000. That comes to $7,500 a year. This is the amount you’ll be able to draw out as income.

If you can live off of $7,500 a year, you’re set for life. If not, you have to increase your retirement income, decrease your retirement spending (especially your cost of debt), decrease current spending (to save more now) or a combination. If you are going to have $1,000,000 saved by the time you retire, those retirement investments will generate $50,000. You may not have to worry about anything….or you may have to worry about a lot.

You don’t know where you stand until you plan out:

  • How much you’re going to have
  • How much you’ll be spending
  • How much income you’ll receive

You’re looking for a balance – and you have to understand that balance. That’s the only way you’ll ever know how much money you need to retire.

2. Spending

Having said that, it’s always wise to boost your current savings and a great way to do that is to learn how to stop spending. I’m not asking you to live in a cave (although it would be super cheap!), but always shop around. If you need a car, buy a slightly used one. It will save you a ton of money. Cut (way) back on eating out too. That is the biggest budget buster there is.

Think of every dollar you spend today as three you might have in the future. When you spend money, take out a dollar and give George Washington a kiss goodbye. Do this because you’re never going to see that dollar again. (You’ll hate embarrassing yourself by kissing your money goodbye in public, so you’ll spend less! Unique idea!!!)

3. Debt

If you don’t have debt, great. Never ever acquire it. If you are in debt, put all your energy into getting out of debt as soon as you can. There is nothing more important to your financial well-being.

4. Retirement Investing

Once you’re out of debt, maximize your retirement contributions. This is especially true if your employer offers a plan. Often they match each dollar you put in with 15 cents or more. That’s an automatic profit for you so take advantage of it.

5. Develop an Investment Strategy and Stick with It

There are many ways to invest your money. You can buy and hold; you can invest in ETFs, stocks or mutual funds. You can be “market sensitive.” I’m not going to tell you the best way to invest for retirement here. But I do want to emphasize that you’re going to be disappointed at some time. No investment strategy does great all the time. You may have a strategy that doesn’t perform well over a year or two. You might be tempted to abandon it.

Make sure your investment approach is sound. If it is, stick with it even when times get tough. People who switch their strategies often are those who do the worst in my experience.

6. Protection Using Life Insurance and Trusts

Be smart about life insurance. If people depend on your income, you have to own life insurance – but make sure you get the right amount of life insurance. And make sure you get cheap term insurance. That’s the way to protect your family. Also, keep in mind that things change. At some point, your dependents will become independent. They won’t rely on your income anymore. Once that happens, you won’t need life insurance anymore, or you’ll be able to get by with less. However, as you advance in age, sometimes things don’t work out. You might find that even as a senior you need life insurance. If that’s the case, make sure you realize it and take every step possible to get the cheapest senior term life insurance you can.

While we’re on the subject of protection, make sure you have the proper trust or will. Talk to an attorney to make sure everything is in place. And remember that things change. Laws get updated and your situation shifts. I recommend that you update your trust every five years at the very least.

Remember that you’ll likely Live Long. Now go out there and Prosper by following these 6 steps.

 

Photo credit by Orange Country Archives, Flikr

 

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{ 9 comments… read them below or add one }

ChristineWithRegence October 18, 2010 at 7:32 AM

Great tips! For ideas on how you can take charge of your health care costs, check out Whatstherealcost.org.

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Mary October 15, 2010 at 5:02 AM

The only way to have a decent retirement is to save 15 – 20 percent of your pay every single month of your working life. Forget all other estimates. SS and pensions are going to be decimated in the future so you have to take care of your own retirement. You just have to live on less money, how you do it is curbing your consumer appetite and for young parents you have to curb your parental guilt.

Don’t worry about where you are going to invest until you have your savings in order. If you can’t save you are not exhibiting the financial savvy to invest in the markets. When you have savings then you start considering investing and start with simple financial products.
You can’t slice and dice a couple of thousand dollars among different asset classes – the fees will eat your savings.

Working builds wealth, saving stores wealth, investing protects wealth.

You are not going to get rich in the markets, you are simply trying to protect your savings from the ravages of inflation. Right now is a wonderful time to learn how to protect your savings as there is very little inflation and one does not have to take large risks in order to protect savings.

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Mary December 2, 2010 at 1:19 PM

I am nearing retirement and how it played for us was 15-20% automatic of gross. 15% was when we were saving for real estate down payments. However at a certain point (40+) we found our lifestyle no longer was on an upward trajectory though our income was. So yes as we approached 45+ we started saving even more – it was just easier. That said I do not think there is any excuse not to save at least 15% – it is just irresponsible. You find a way, your future depends on it.

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Rich with SFP October 12, 2010 at 6:40 PM

Speaking as one who is retired, these are all good suggestions. There is nothing worse than getting to retirement and not being prepared! Thanks,

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karyn October 11, 2010 at 5:19 PM

I would love to hear your answer on that one. And truly, we’re pretty frugal. No cable, old cars (without payments), clothes from thrift stores, etc. Any extra money goes towards kid stuff like homeschooling materials, piano lessons, and such (yes, I know these are extras). It’s tight because I’m home with the kids, which is worth it, but I would love suggestions for retirement planning. I do work part time in the evenings when my husband is home.

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karyn October 11, 2010 at 5:02 PM

I hate thinking about retirement savings. Our budget is so tight nowadays and then we have four kids to at least help through college, though I would like to be able to pay for most of it so they don’t have college debt. But we’re not getting any younger! What do you think about having different IRA’s? I read once that it was wise to have an IRA in foreign stock, one in small caps, and one in large domestic caps. Does that sound wacko?

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Neal@Wealth Pilgrim October 11, 2010 at 6:01 PM

Karyn,

Sounds like you and your husband are really focused on the family and doing the right things. I am going to write something so keep your eyes glued to Wealth Pilgrim.

Also, tomorrow’s post might be helpful.

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neal October 11, 2010 at 5:13 PM

Karyn,

It doesn’t exactly satisfy all the requirements for something to be “wacko”…but close. It’s something I’ve heard as well but it’s a pointless exercise. You can diversify by having lots of different funds or stocks within one IRA account.

You bring up another really important question however….what do you do when you can’t save money? Let me ponder and post….

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Khaleef @ KNS Financial October 11, 2010 at 10:17 AM

I think kissing your money might work! I guess so would self control (but that’s no fun). It’s hard, but if we set our mind to it and think of all the future benefits, we’ll make the effort!

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