Saving for Retirement on a Budget
Retirement can seem like a long way off, but it's never too early to start contributing to your life after work. Even if you're on a tight budget or live on a lower income, there are a few things you can do to set yourself up for a comfortable retirement.
Getting started:
The most important thing is to get started. Small amounts added in every month or quarter can make a big difference over time. Remember, this really comes down to the little things. The sooner you start saving, the more time your money has to grow. Some of you may be thinking, this is easier said than done. What about cost of living? What about debt payments? What about rent?
Yes, all of these things can be barriers to saving. Again, I will point you to the importance of having a strong budget. Knowing that these things will cost you in the short term, planning for the long term can be incredibly beneficial to you.
Here are a few tips to help you get started:
- Set a goal. How much do you want to have in retirement? You can plan this out as an annual amount or as a total amount. I usually suggest an annual amount because it keeps you on track and is a little more personalized to your individual situation. Once you know your goal, you can start to create a plan to reach it.
- How much is needed? The amount of money you'll need to retire comfortably will also vary depending on your lifestyle. However, as a general rule of thumb, you'll need about 70% of your recent pre-retirement income to maintain your standard of living. I.E. If you make live on $100,000 per year, when you retire you will likely need about $70,000 per year. Keep in mind that this is a baseline amount... saving more is never a bad idea.
- Make a budget. I cannot stress the importance of this enough. Many of my suggestions henge on making a budget and tracking your income and expenses. Saving for retirement is the same way. This will help you identify areas where you can cut back so you can save more and allow you to build savings into the mix.
- Automate your retirement savings. There are 2 main ways to do this:
- Set up a monthly draft from your bank account to deposit into your Roth or Traditional IRA as a contribution. This way, you know you are contributing regularly, and you can add it as a line item in your budget. (If you have questions about how I manage my budget, please reach out to me. I have a very specific method that I use and would be happy to share with you and give you tools to use in your own budget).
- Take advantage of employer sponsored plans: 401(k)s, 403(b)s, Simple IRAs, etc... Just like your individual accounts, set a certain amount of your income to save in these plans before the money even hits your bank account. You may also get an employer match which is extra money earmarked for your retirement!
- Review your plan regularly. As your income and expenses change, you may need to adjust your savings plan. Some years, you may make more and are able to save more. Some years may be the other way around. Get a second opinion from a financial advisor if you have questions. That is what we are here for.
So, how much do you need to contribute?
Advisors get this question a lot. Most of the time we answer with the dreaded, “it depends.” But it does depend! The amount you need to save for retirement will vary depending on your income, expenses, and retirement goals.
But to answer your question, a good starting place is with your employer sponsored plan, specifically, the employer match that your company offers. If you don’t know what your company’s match is, ask! Employer matches tend to be around 5%1 (on average). I would make sure you are taking full advantage of this match before considering other retirement account options. Afterall, this is extra money for your retirement.
I usually suggest contributing to your most tax advantaged option (Usually post-tax or Roth option). This saves you taxes in the long run, especially if you believe your income will increase over time. However, if you are in the peak of your career, it may be helpful to decrease your current tax liability by contributing in a “before-tax” option.
Regardless of your situation, I believe saving at least of 15% your income in a retirement account is a great place to get started. This can be split into different accounts. Most will be in your company’s retirement plan (discussed above).
Financial advisors can open you an Individual Retirement Account (IRA). This account is owned individually and allows you to make annual contributions to your retirement outside of your employer’s 401(k). There is a limit to these contributions, so talk to your financial advisor about the best options for you.
Your goals can always change. If you can only afford to save up to your employer’s match, start there. You can and gradually increase your contributions over time as your income increases. The goal here is to eventually put away roughly 15-20% of your income (depending on your situation) each year, but consistency is your friend.
Tax benefits to saving with a lower income:
There are great tax benefits to saving with a lower income. For lower income earners, you may be eligible to contribute to a Roth IRA. Roth IRAs are great vehicles to build tax advantaged growth. Here is how they work:
- Contributions are made with regular income that you earn from your employer and pay taxes on. These are considered after-tax dollars. Investments are then purchased in the account.
- Withdrawals, although not required, are tax-free if you meet certain requirements.
- Roth IRAs can also be passed down to your heirs and have the same benefits.
Another quick note: Your taxable capital gains (Gains realized in a taxable investment account) may be assessed at a lower tax rate based on your income.
There are other ways to save:
Here are some additional tips for saving for retirement on a budget:
- Cook at home more often. Meal prep! My wife and I do this the best we can, and it works out well most of the time. Eating out can be expensive but it’s convenient. We don’t cook every meal at home, but we do the best we can!
- Shop around for insurance. Insurance can be another major expense and those costs can be a major hurdle. Find the deals, do the extra work to get a good rate.
- Cut back on unnecessary expenses. Take a close look at your budget and identify any unnecessary expenses or the random subscription you forgot to cancel. You may be surprised at how much money you can save by cutting back on these expenses.
- Get a side hustle. Not always the best use of time, but if you could work part time, do some freelancing, or starting your own business. Maybe even sell unwanted clothes or furniture. That can be a great way to earn some extra cash.
Saving for retirement can be a challenge and it’s a long game. Most of what you do now will not be seen until retirement, but it is what you do now that will give you the most benefit. I want to encourage you that it is possible to save even on a budget. Making incremental changes and consistent progress is well underrated. Take a look at your financial picture every once and a while and reassess where you want to be.
One of the major roles for any financial advisor is continually reviewing your goals and plans – making sure our clients are on the right path. Some of my favorite meetings are with clients who want to get together and learn, build a plan, and follow through on their goals. The plan can change, yes, and that is why we set regular visits to make sure we are accounting for as many variables as possible.
If you have questions about your financial plan, or about budgeting, saving for retirement. I encourage you to reach out to your financial advisor and ask those questions. It is important for us to understand what your concerns are and help address your questions!
