Step 1 - Save A High Proportion Of Your Income
The key to retiring early is to start saving early, and to save a high proportion of your income. If you are able to save 15% of your income from age 30 onwards, retirement at 60 should be a relatively easy goal. If you start later, the amount you have to save increases. For example, if you start at 40, the amount you need to save for a comfortable retirement cushion increases to 25%. These are fairly conservative numbers - if you are able to earn a rate of return in excess of 6%, or if you don't mind taking some risk that you might outlive your money in a bad market environment, then a lower savings rate may still enable you to meet a goal of retirement at 60. Social security could further improve your retirement situation, but the long term solvency of Social Security in its current form cannot be guaranteed.
Step 2 - Hold Stocks As The Majority Of Your Portfolio
Once you are saving a high proportion of your income, you then need to grow your money through compounding. This is where a service like FutureAdvisor can help get you the allocation you need for success. You want to make sure that stocks form the majority of your portfolio, but that you have some diversification by asset class and geography to manage risk. You want to make sure that your allocation changes to match your age, and that you efficiently allocate and rebalance for tax efficiency. FutureAdvisor is able to do all of this for you by using robust and low cost investments.
Step 3 - Pay Attention To Tax
Taxes can erode your savings, so it's important to invest in a tax efficient way. This means that you want to save into investments that can help your money grow tax-free such as 401(k)s and IRAs. Doing this gives a free boost to your savings, because you can save more of your income and watch it grow faster. You may also be able to take advantage of employer matching with your 401(k) which can make your money grow even faster.
|Traditional 401(k)||Traditional IRA|
|Eligibility||Eligibility depends on employer, as 401(k)s are employer-provided defined-contribution plans||Any individual under 70 with taxable compensation is eligible|
- Age <50: $18,000 per year
- Age 50-65: $18,000 per year + a $6,000 catch-up provision per year
- Age <50: $5,500 per year
- Age 50-65: $6,500 per year [capped at level of taxable compensation]
- Paycheck contributions may be made
either pre or post tax
- Earnings are tax deferred until withdrawals/distributions
- Contributions are typically tax
deductible (up to a limit if total earnings are above a certain level)
- Withdrawals/distributions are taxed
|Employer Match||Employers often match a pre-selected percentage of each employee's individual 401(k) contribution||Not available|
|Investment Selection||Investment selection may be limited and often includes pre-packed products such as target date funds. Consideration of expense ratios and underlying costs is important||Wide selection of potential investments|
Step 4 - Review Our Savings Tips To Raise Your Savings Rate Over Time
Track Your Savings
You know the old saying "what gets measured gets managed?" Well, the simple act of tracking your savings can often encourage you to save more.
Do you know how much you have in your savings account? Take a look. Get to know that number. Learn when it goes up and when it goes down. As you track your savings, you'll be motivated to keep that number moving in one direction: up!
Make a Savings Goal
One of the best ways to increase your savings rate is to make a savings goal. Maybe you want to save 20% of each paycheck. Maybe you want to save $10,000 by the end of the year. Maybe you want to max out your Roth IRA.
When you make a savings goal, you make a promise to yourself: you are going to save money. Once you make that promise, you'll be even more motivated to keep it.
Want additional motivation? Share your goal, and your progress. That way, you'll have a community of people to support you as you achieve your goals.
Pay Yourself First
What happens when your paycheck hits your bank account? Does it sit there, waiting for you to draw out money for the electric bill or that pair of shoes you've had your eye on? Or does part of your paycheck automatically transfer over into your savings account?
By paying yourself first, you send money straight to your savings account so you can't be tempted to spend it on anything else. It's also a great way to automate your savings process: out of sight, out of mind, into your savings.
Take a look at your bank's website and find out how to set up an automatic savings transfer. Then, set up automatic transfers to deposit a portion of your paycheck into savings every time you get paid.
If you're lucky enough to get a bonus or a pay raise at work, consider saving that immediately. If it's not money that you're used to spending then it will be easier for you to increase your savings rate without feeling any pain.
Cut Services You Don't Use
Want to save more? Free up more money for savings by cutting services you pay for but don't use. Cancel the subscription to the magazine you never read. Cancel your gym membership if you haven't gone to the gym since January. Consider becoming one of the many people who cut their cable subscription and watch TV on Netflix.
The more services you cut, the more money you save. So take those monthly payments and turn them into monthly transfers into your savings account.
Round Up Purchases
As you know, small amounts of money can quickly add up! So why not make sure your money adds up in your favor?
Individual Round Up program rules may vary, but the typical Round Up program looks something like this: whenever you make a purchase with your debit card, your bank automatically rounds up the purchase to the nearest dollar or the nearest $5—and puts the extra change in your savings account.
See if your bank offers a Round Up program, decide how high you want to round up, and start saving money every time you swipe your debit card.
Increasing your savings rate is a matter of figuring out how to get money into your savings account, IRA, or other savings vehicle before you have a chance to spend it on something else. Use these tips to get started, and then see just how much you can save!