How To Start Retirement With 1 Million SavedBuilding Wealth - When To Get Started
Reaching the age of retirement can bring with it many changes to your lifestyle. For one thing, you needn’t rise with the alarm clock every morning to hop in the shower, toss down some coffee, and get on the road just in time for rush-hour traffic to make it to work on time.
Your days will be your own to do with as you will, relaxing in front of the tube, weeding the garden, volunteering, or even making time to see some of the many cities on your bucket list (finally!). You might even start the business you always dreamed of or go back to school for lessons.
However, retirement also comes with the realities of a fixed income, and even if you’ve planned carefully for your golden years with a 401K, Roth IRA, and investment portfolio, you still need to be careful about how you spend.
How to Plan For Your Retirement
For one thing, you might want to think about finding ways to reduce your monthly bills. Although you have likely paid off your home by now, you still have utility bills to consider, and if you’re living in the large house that you raised your family in, the money needed to heat, cool, and light your space could be higher than what you can afford.
Plus there are the annual costs of property taxes and insurance to add into the equation. This is why many people choose to sell their homes and move into a smaller property, allowing them to cut their monthly payments and put some money in the bank for a rainy day.
It would help if you also were careful about how you budget. A steady income allows you to spend on credit, knowing that you’ll be able to pay it off within a few paychecks. But when you switch to a fixed income, you need to remember that whatever you spend is gone.
Your accounts will not be refilled courtesy of monthly payroll. And if you run out of funds, you’ll have to return to work, sell off valuables, or even depend on government handouts to survive, none of which are likely to be much fun for a senior citizen.
However, with careful planning you can still take trips, purchase big-ticket items (a new car, for example), or share the wealth with friends and family (savings that were slated for disbursal upon death can be given now as gifts to help grandchildren pay for college). You have to plan accordingly so that you don’t face any penalties and you ensure that you still have enough to live on for the foreseeable future.
Of course, just because you no longer have a job doesn’t mean you have to stop growing your retirement funds. Now that you have some control over the management of these funds you may choose to make investments (in other properties, the stock market, etc.) with a portion of the money you’ve saved for your dotage. If you invest wisely and the market goes your way, you could end up making some money after retirement instead of just spending it.
Understanding Compound Interest
Compound interest is a way to save money and keep your savings working hard for you throughout your professional career. Most bank accounts and retirement accounts earn compound interest.
Specifically, compound interest refers to a situation where interest is earned on the principal (initial investment) plus the interest earned up to that point. This allows it to create value faster than simple interest, in which interest is earned only on principal.
For example, you can set aside $ 1,000 per year for 30 years at an interest rate of 10% and have a nest egg of almost $ 200,000. You won $ 170,000 on an investment of only $ 30,000. This is all due to the power of compound interest.
Also, if you put in that $ 30,000 all at once at the start of the 30 years, your total would instead be around $ 525,000.
Calculate How Much You Need To Save Each Month: Search online for a compound interest calculator with the option to add a monthly or annual contribution. Enter a reasonable interest for the type of investment account you plan to use and the number of years between retirement as a time limit. Then play around with the initial deposit and monthly contributions until you hit your retirement goal.
For example, make your initial deposit the amount of money you currently have to retire and start with a small initial monthly deposit ($ 50 or $ 100). Calculate the monthly deposit amount until you reach your goal.
You May Not Need To Deposit A Lot Of Money: A 25-year-old who starts at $ 10,000 and deposits $ 100 per month until he retires at 65 will have over $ 550,000 by his retirement.
The interest rate you use will depend on the nature of your investment account. However, for preliminary purposes, use 8%. This number represents the average return you can expect from a diversified portfolio of securities over time.
Create a savings plan based on the monthly amount you need to save, create a monthly budget that takes that amount into account. Even if you can’t afford to pay the full amount now, put aside what you can and put it in your retirement account. The important thing is to stick to your plan over the years, until retirement when everything is worth it.
Saving now for retirement can help you save more later. In other words, setting aside even $ 50 per month now can help you remember it and allow you to save $ 300 per month when you can afford it.
Over time, you will advance in your career and pay off the debts you currently have. You can then pay this extra money into your retirement account. Remember, it’s okay to contribute more than the amount you originally calculated. Most people end up contributing the most in retirement in their 50s and early 60s because other expenses are reduced.
An easy way to transfer money to your retirement account to contribute more when your kids are away from home. Once they start supporting themselves, take the money you spent helping them and put it into retirement. This way, you won’t even notice the increase in savings (except in your account balance).
Leave Your Money Until You Retire: It can be tempting to access your retirement account to make large purchases as the balance grows. However, the money you take out is money you can’t have later and only reduces the amount of interest you can earn. Also, any money withdrawn from the account is taxed as income at the same rate as your regular tax bracket. Those under 59.5 will also have to pay an additional 10% penalty on the withdrawal.
You can avoid having to use this account for emergency expenses by keeping an emergency account that contains at least six months of living expenses.
You can avoid paying tax on your retirement account when you change jobs by transferring the balance to a retirement account with your new employer.