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How to Start Saving for Retirement for Beginners

Financial Tips

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  • How to Start Saving for Retirement for Beginners
PUBLISHED BY Sally Pau / June 18, 2021

One of the greatest incentives to working hard now is so you can work less in the future. Retirement is part of the financial game plan many of us have had to navigate over the years. Since the very first paycheck, social securities are taken out and set aside for a workfree heyday. And it’s a super important consideration. Without enough financial cushion, the day of retirement never comes. It takes some proper planning to prepare for a comfortable future once the working age is passed.

Most Americans start off quite optimistic about having a successful retirement. A poll found that young adults between 18-29 years old expected to retire early, closer to 60 years old. Such optimism, unfortunately, tends to dwindle as the years pile up. In truth, how to save for retirement has many faces and can be quite complicated. But when should you start saving for retirement, and how much to save for retirement? This article explains why should you save your money for retirement and how to start saving for retirement.

Why is it important to save and invest for retirement?

There are quite a few benefits from taking action toward early retirement. The first being that as you get older you’re more likely to acquire extra expenses, such as a mortgage or a family. It’s better to build a safety net before you get backed up. A greater future also leaves room for greater goals and a greater plan for achieving them. No matter your age, now is the time to set some investment goals (long or short-term) so that you can save more effectively. Once you’ve got clear goals, you’ll be able to create a saving strategy and stick to it. We’ve written about the ways to start saving money as an independent contractor, which offers helpful budgeting tips for all professions.

Another great reason to consider early retirement planning is something called compound interest. This is when a sum of money continuously grows exponentially over time due to collected interests. The difference between this here and simple interest is that interest grows on the principal and the interest as well. Therefore, if you start saving early and collecting compound interest, time itself becomes a contributing factor. Start earlier with less, outdo later with more. There are different ways to go about gaining compound interest, which we’ll get into later.

Lastly, timely retirement saving and investing lead to financial freedom. A recent movement known as the FIRE Movement is centered around early retirement through financial management. The management practices are emphatically put into place early on, resulting in financial independence. Whether you consider yourself “FIREd” or not, a likelihood remains–the earlier you invest, the better you can enjoy your wealth. This is especially so for independent contractors, who have more financial responsibilities. The answer to the question “when should I start saving for retirement?” is now!

How much do I need to save for retirement?

Now that we’ve addressed why save money for retirement, let’s look at the steps of how to start saving for retirement:

Most experts agree that one needs about 80% of their annual pre-retirement salary for their retirement salary. For example, if you earn $80,000 a year, you’ll need $64,000 a year to sustain yourself once retired. This is thought to be the maximum percentage amount someone will spend in retirement. It will differ depending on your desired lifestyle after retirement. It also takes health care costs into account, so a healthy body will have lots more spending money!

There are also a few ways to calculate how much money to save for retirement. One popular and easy method is called the 4% Rule. To calculate this amount, divide your expected annual retirement income by 4%. Therefore, if you want to have $64,000 in income each year once retired, you’ll need to save $1,600,000 ($64,000 ÷ .04) in total. This estimate assumes no additional retirement income, a 5% return on investments, and a dedicated yearly commitment to your finances. Age is also a factor here, so we’re dealing with averages.

How to Start Saving Money for Retirement

A Gallop poll found that most folks expect their Social Security, 401(k) to secure them for retirement. And that’s a great place to start. A 401(k) is a retirement investment account offered by most employers to their employees. It puts a percentage of your income into such an account before investing it into stocks and bonds. If you’re paying social security to an employer you’ve no plans of diverging from, your retirement is already underway. But some people do not have conventional circumstances of employment. Some workers earn their income by way of the gig economy and its opportunities. Other employees may not earn enough from their 401(k) alone. In such cases, there are other ways to start saving for retirement.

Consider putting your money into an IRA, or individual retirement account. There are different types of IRAs. One of the more popular amongst the variety is known as a Roth IRA. What makes a Roth IRA stand out from other retirement accounts is that it only collects post-taxed income. That means that tax is paid on funds going into your account, but it is completely tax-free upon withdrawal. Roth IRAs take the load off of future retirement tax and are good for those who expect larger tax obligations further down the line. What’s helpful is that most banks, firms, and investment companies offer Roth IRAs. That goes for physical and online businesses, so it’s easy to learn more or get started.

Lastly, consider CD accounts, or Certificate of Deposit accounts. These accounts let you save money for a specific amount of time at a fixed interest rate. Money market accounts are good too. These accounts usually offer higher interest rates than normal savings accounts, with a debit card and check-writing privileges too. Both options are especially helpful for those with intermediate-term saving goals—in case you’re getting a late start.

Keep in mind that this is just a taste of the available options for those contemplating retirement. There are innumerable routes and formulas. Find a good broker who will zero in on your situation and offer the best investment solutions for your goals. Those with less wealth who are just getting started should find a no-minimum broker with no start-up fees. Above all, the most important thing to do is to simply start saving.

Other Helpful Retirement Saving Tips:

  • Consider a SEP (Simplified Employee Pension) Plan It’s a form of IRA where employers (including the self-employed) can set aside a variable percentage of income for their employee(s). It has neither start-up nor operating costs like more conventional IRAs.
  • Consider the Years These days, people live longer than they did in the 50s. The average lifespan for North Americans is right around 80 years of age. When financial goal-setting, consider just how many retirement years you’ll need to secure.

It’s better to start saving for retirement early. When asking how to start saving for retirement, planning and goal setting are essential. There are different ways to go about investing for your retirement. It’s best to consult a broker and most importantly, just start saving.

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