Learning to invest for retirement is an important thing for most any person. If you are married, or single it should be a part of your life’s planning and you should think about it regularly. Many people who invest and save well are able to retire a little early, not have huge worries about money, possibly travel, and enjoy life more as they get older. This is great…right?
So, when we think about savings and investing for retirement, we need to focus on a couple of key points and we will go over these below. The great thing about most governments or societies, is that they have tax benefits often to save for retirement. The benefit for your country, let’s take the USA for example, is that you will be able to save at a rate faster than if you were just saving in an after tax account!!! So, let’s start getting into what does this mean for you and how should you go about starting to save for retirement.
First, a budget is typically part of the process for determining what amount you can save each period. Let’s take your monthly salary or income for example. If you earn $2,000 per month in salary you can start to work backwards to determine how much you spend each month by subtracting each expense that you have each month. To keep it simple…if you have $2,000 in salary and $1,500 in expenses then that leaves you with $500 to invest.
Next, once you have the amount of savable income you’ll need to decide the breakdown of how you save this money. Just because you have $500 of savable income, this doesn’t mean that all of it can be saved. You’ll find that while you expect to have $500 left over after you finish the budget, often you’ll find extra odds/ends that you want to spend your money on. Right? The next part of the budget is that you may have big outlay’s of money that you are planning to spend on, and so while this won’t necessary affect savings, it will affect how you save:
Taxable Savings/Investments: This bucket is comprised of money that is free and clear for you to spend on anything you want…because it has already been taxed as salary. You can put these savings in a Schwab account for example, and it can be invested into stocks and bonds without concern for when you need the money. These investments can be sold at any time and withdrawn by the account holder.
Non-Taxable Savings: These types of savings and investments are tax benefited accounts setup by the government to help people save for retirement. So, for example, these type of accounts are 401k and IRA retirement accounts. In general, these funds are invested into over time, but the withdrawal of these funds can be heavily taxed when you take them out. The reason for this is outside of the scope of this article, but quickly, they are taxed because the account holder was able to invest non-taxed money into these accounts and the capital is allowed to grow tax free until retirement.
So, why does the tax status of your savings & investments matter: It matters mostly for two reasons: (1) You may get taxed when you access the money, (2) What is the timing of when you need the money? These two issues are very important, because you should try to have some idea about the major expenses in your life, and try to plan for how you save and invest your money. So, if you want to buy a new car in 5 years and you want to save now…in general you will not want to put these savings into a non-taxable retirement account if you indeed this money prior to your retirement.
Hard to answer…How much do you need to save for retirement? The answer to this question will be different for all people, and there is no right answer. What you’ll need to do is start with a list of what are your planned expenditures, or said another way, what are you saving your money for? This list doesn’t need to be perfect but it should be realistic and close to the big expenditures that you plan in your life. Here are some examples:
- Getting Married $10,000 in 2 years.
- Buying new car in 5 years for $30,000
- New House for $150,000
- In retirement I plan to spend $3,000 per month for living expenses, health, and travel.
This is obviously a very brief list, but it is the starting point for helping you to determine how much you need to save for retirement, and how much you need to save for major expenses along the way.
Do a budget, a planning worksheet, and stay ahead of the game!!!
This is so important for the planning of your future, and to ease the burden on yourself as you move toward retirement. Let’s face it, regardless of age, we are all moving towards retirement each and every day.
Hopefully this isn’t your first crack at planning, budgeting, retirement, and savings calculations. Comment down below in the sections area to let us know if you have any questions or comments about the article. We’d love to take your suggestions to make the article better and more helpful for our readers. As always…Good Luck!!!
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