5 Do’s and Don’ts of Saving for Retirement
No matter how far away you are from retirement, there are simple ways for you to step up your savings at any point. Especially if you’re in your 20’s or 30’s, you have plenty of time left to implement smart saving strategies to set yourself up for a successful retirement. Kevin Lao, certified financial planner, founder and director of financial strategies at Imagine Financial Security in Jacksonville, Florida, has a few do’s and don’ts that he recommends that will help you boost your retirement savings.
DO beware of the “tax trap” that occurs with traditional retirement accounts
With traditional 401k’s and IRA’s, you are required to take distributions out of your retirement account once you turn 72. These required minimum distributions (RMDs) occur whether you need the income or not. Lao refers to this as the “tax trap” because these RMDs can increase your taxable income, which then increases the tax you’ll pay on those tax-deferred savings once they’re taken out. On the other hand, Roth accounts do not have RMDs, and your savings can be withdrawn tax free.
“If you’re a good saver, meaning you’re saving more than 10% for retirement, all else equal, I would steer toward a Roth over a traditional account for younger people that are 10+ years away from retirement,” recommends Lao as one of the general rules to follow. “From a retirement savings standpoint, it’s not about what you can earn, it’s about what you keep.”
There are, of course, caveats to this rule; one of them being your state’s income tax rate. “If you’re working in a really high tax state like New York or California, and you plan on retiring in a state with a lower tax rate, then maybe you will want to defer over the Roth,” he notes.
DO “reverse budgeting”
We know you’re tired of hearing about budgeting, but reverse budgeting is a little different. Quite the opposite, in fact. It starts with writing out your goals — whether it’s traveling the world, funding your children’s education, or retiring early. “If you’re married, I always recommend doing it with your spouse,” says Lao.
Once you’ve written your goals, you will then set the numbers to determine how much you need to be saving each year to get closer to your goal. It doesn’t have to be exact, but this is how you’ll allocate your savings.
“This should be the first thing that you look at each year when looking at your income after tax. Subtract the number you set for each goal out of your take home pay,” he explains. The amount that’s leftover is free for you to spend on whatever you want to spend it on.
Budgeting can feel restricting. Reverse budgeting helps you put into perspective that you can buy things for yourself here and there without worrying about steering away from your goals.
Lao concludes, “This removes the burden of thinking about how much you spend on Starbucks each day — you can buy Starbucks as long as you’re making progress towards your goals. If you have a compelling ‘why’ in terms of what you’re saving for, and you’re actually doing those things, then it removes the guilt from buying a pumpkin spice latte.”
DON'T put all your eggs into qualified retirement accounts
The mindset of saving as much as possible just to retire once you hit 65 is a lot less common nowadays than it was in previous years. “People want a career they’re passionate about, one that they feel fulfilled in,” Lao adds. “Saving just to retire is not very motivational these days.”
Your mindset ultimately has the biggest impact on the fulfillment you will feel once you do retire. Of course, we all want to live a happy retirement that meets our desires, but you should have the right mindset in the short-term rather than just working to allocate your savings to your qualified retirement account.
If you’re saving into other investments that are not retirement accounts, such as mutual funds, equities, ETFs, bonds, or cash, that gives you the ability to make other investments throughout your life that may come up, like starting a business or investing in real estate, without having to tap into your retirement accounts. “Inevitably, this can help you boost your savings long term if you make smart investment decisions along the way.”
“Certainly save for retirement,” he clarifies. “I always recommend a minimum of 10% to retire on time, 15% to retire a little early, and 20% to retire early and have a legacy that you leave behind. Take advantage of matching contributions, at least.”
Are you saving enough for retirement?
DO have gratitude
Believe it or not, saving for retirement isn’t really about how much you make in your job or how much you save each month. Lao believes that boosting your retirement savings is more of a mindset rather than a stated action. “Two of the things that I believe help with the mindset of saving more are having gratitude and being thankful for what you have. If you have this mindset, you’re probably less likely to buy certain stuff that you don’t need, and as a result, you have more that you can put away to save and invest,” he says.
How can you change your mindset to reach your goals? Hiring a financial advisor to help you put everything into perspective can make a big difference and give you the clarity you need. “Once you have an advisor that knows your situation and can act in your best interests, they can line up your balance sheet and your cash flow to move closer to that vision,” explains Lao.
Writing down your goals and regularly reviewing them improves your purpose and your energy around what you’re doing and improves your probability of success in moving toward that goal.
DON'T get trapped in the “rat race” of retirement
Ultimately, Lao warns against what often results when it comes to saving for retirement. “I’m much younger than a lot of the clients that I work with. What I found is that the ones that are super happy in retirement aren’t the ones who worked just to save and retire as soon as they could. A lot of the ones that are happy, healthy, and enjoying their lives in retirement are the ones who actually retired for a purpose.”
Maybe they wanted to retire to spend more time with their grandkids, travel the world, or even start a nonprofit. Don’t get stuck in a job just for income.
“This is one of the values of working with a good financial planner. They can actually take you off the treadmill of life and get you to think about your goals,” he concludes.
Setting these goals and breaking them down will help you create tangible habits and make your goals more attainable. It’s important to remember that even once you do retire, you’re still responsible for keeping your finances in check. Establish strong financial habits now to help build a routine for you to live securely in retirement.
rebel Financial is a registered investment adviser and the opinions expressed by Imagine Financial Security in this article are their own and do not reflect the opinions of rebel Financial. All statements and opinions expressed are based upon information considered reliable although it should not be relied upon as such. Any statements or opinions are subject to change without notice.
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