How to save for retirement?
How saving for retirement when you have a small income? This question comes up very frequently in the writing of Finance de Demain. Today we are going to think about it together in order to find a what to do. If there is a tactic of personal finances What almost everyone agrees on is the value of saving for retirement, or at least for your second act.
There will come a time when you no longer want or can’t do the job you’re currently doing and moving on will result in a significant drop in your income. At that point, you’ll be grateful for every drop of savings. Life without retirement savings can be incredibly difficult. In this situation, finances can be a real challenge.
Contributing to things like retirement can be hard to justify when you're worried about keeping the rent paid or the menacing noise coming from your car or making sure everyone has enough to eat. But how do relatively low-income households save for retirement? In this article, I provide you with some answers to this concern.
Table of contents
Start now. Don't wait.
When it comes to retirement savings, it's better to save even a small amount now than to wait until later. Save as much as you can as soon as you can, even if the amount you can save now is only a few dollars a week.
Why is this so important? That's because of the power of compound interest. Let's say you're going to retire at age 70 and by then your retirement investments will be earning 8% per year.
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Let's take an example
Suppose you can only afford to set aside $500 a year – literally $10 a week, with a two-week break.
- If you start doing that at 40, you will have $50 retirement savings.
- Starting to do that at 30, you will have $160 retirement savings.
- If you start doing that at 20, you will have $370 retirement savings.
Why is there such a big difference? It’s compound interest. If you invest your money and let it sit there and grow, it will grow faster and faster the longer it sits there. So the sooner you start saving, the more time you give it. If you choose to wait 10 years, you’re missing out on a lot of growth. It’s simple: act now, even if you can only take small steps.
Prioritize your day-to-day finances
The most important first steps you can take have nothing to do with saving for retirement at all. They involve getting your day-to-day finances in order. There are probably already financial obstacles in your way that make it difficult to save effectively for retirement, so take care of them as soon as possible. First, pay off your high interest debt. Any debt you have with a double-digit interest rate needs to go. Credit cards. Get rid of them as quickly as you can.
Second, create a emergency cash fund. Stop relying on credit cards or payday loans for emergencies. Start putting money into a savings account somewhere—and if you don’t have one or can’t get one, start saving it at home for now. Eventually, you’ll want to get a savings account in a bank, which you should be able to do once you have accumulated some money.
How can you afford to do these things? Live as cheaply as possible. It’s okay to relax and indulge, but explore ways to do it that don’t involve money leaving your pocket. Splurge on long walks without your cell phone. Invite a friend to do something free. Get lost in a library book. Don't splurge by buying stuff or paying for experiences.
Start small and automatic
Once your day-to-day finances are stabilized, slowly start saving. You don't need to contribute thousands of dollars a month to retirement. In fact, doing so will likely destabilize your finances and put you in a worse situation. Instead, start by contributing what seems like a manageable amount. Go low, not high. If you think you can manage $10 a week, save $10 a week. If you can handle more, do so, but don't push it.
You're better off saving a small amount and keeping your daily finances stable than trying to save too much and ending up in trouble. Whatever you decide to save, make it automatic. If it's through a work plan, have it automatically deducted from your paycheck. If it's your own plan (see below), have it automatically withdrawn from your checking account each week. You don't want to have to think about it, or you'll find ways to talk yourself out of it. Start small, start automatically.
Increase your savings when your income increases
If you get a raise, use part of it to increase your pension contributions. For example, If you earn $1 an hour more than before working 35 hours a week, increase your contributions $5 or $10 weekly. You still bring home more than before, but you also save more.
As you earn more, you'll naturally pump up your lifestyle a little, which means you'll want to save more so you can maintain a better lifestyle in retirement.
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So, every time you get a raise, set aside a portion of that raise for the future. Just change your automatic contribution every time your salary increases.
Take advantage of savings credit
There is actually a very interesting but little-known tax benefit for low-income people who contribute to retirement savings. It's called the saver's loan and it will really help at tax time. Provided that you are over 18, As long as you're not a full-time student and you're not claimed as a dependent on someone else's taxes, you can get a credit of up to $2 in retirement plan contributions, both through workplace plans or your individual plan.
In summaryé
The most important part of preparing for retirement if you don't have a high income is stabilizing your spending and getting your financial house in order, but you need to do it now rather than later.
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The sooner you start, the sooner you can contribute to your retirement savings, and the sooner you start with this, the more it will grow on your behalf. Now if you want to deepen your training on preparing for your retirement, you can click on this affiliate link to buy a training that I found to be very comprehensive. Moreover, as I explained to you in one of my articles, it was this training that allowed me to set up my retirement plan.
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