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Feel unprepared for retirement? Maybe you haven’t started thinking about it yet. Or, maybe you have, but have no idea where to start. With daily tasks warring for our attention, it can be hard to look so far into the future. The truth is, like saving for anything in life, saving for retirement takes a plan and commitment!
In this guide, we’ll help you build your plan and stick to it in four simple steps!
Step 1: Know your numbers
Start with your budget— what are your monthly expenses, and how will these change after you retire?
Don’t have a budget? Check out our Building Your Budget blog to get started, then hurry back!
With your budget in front of you, ask yourself questions like: Will I still have a monthly car payment, or will it be paid off? Will I travel more? Can I anticipate picking up hobbies that cost money? Consider the answers to these questions and jot down financial estimates.
Once you have your new monthly expenses estimate, multiply that number by 12. Now, you have your estimated yearly expenses. Compare your estimated yearly retirement expenses to your annual income to figure out your “replacement ratio”— aka, how much money you’ll need to save to live comfortably in retirement.
A good rule of thumb for saving is to avoid guessing whenever possible. Two great ways to calculate how much you should save for retirement are:
- Save 10% to 15% of your pretax income: This is a good general rule, and helps you cast a wide net for any additional expenses you didn’t think to factor in above. Decide whether saving closer to 10% or 15% is better for your financial situation.
- The 80% rule: Aim to achieve 80% of your preretirement income every year in retirement. For example, if you make $60,000/year before retirement, you should aim to have $48,000/year in retirement.
Now that you have a general idea of your yearly retirement expenses and you’ve chosen a savings method, you can refine the details using our savings calculator.
Remember: Make sure you review your retirement plan regularly and update it as things change.
Step 2: Research Retirement Accounts
Now, it’s time to get familiar with retirement accounts! You may have heard of the three main types: 401(k), Roth IRA, and Traditional IRA. Not sure what the differences are? Check out our infographic below to get a better idea:
Learn more about Hello’s Roth and Traditional IRAs here.
If you have a 401(k) or other employer-sponsored account, consider adding money to it before opening an IRA. Make sure to double-check your employer’s details about their sponsored account, including, but not limited to, whether or not they match your contributions, how much interest you will accrue, and how inflation may affect the account. Once you know how much you’re saving in your 401(k), consider contributing to an IRA.
If you’re self-employed, consider the following accounts:
- Solo 401(k): Ideal for a self-employed person or business owner with no employees.
- SEP IRA: For self-employed people or business owners with few or no employees.
- SIMPLE IRA: Suitable if you have a larger business, but fewer than 100 employees.
Be sure to do your research on each option and speak with a financial advisor about which is best for you.
Step 3: Make investments
In addition to IRAs and 401(k)s, it’s important to save money in other ways. After all, money won’t make money on its own! Consider these low-risk investment options:
- Index funds and bonds: The key to investing is diversification — try not to put all your eggs in one basket! Index funds and bonds offer investment variety at a low cost and low risk.
- Money Market Account: Earn higher rates on your deposits while keeping access to your money in case you need it with our Money Market Account!
Step 4: Stick to your plan!
Last, but certainly not least, make your contributions and stick to them! Just like a budget, your retirement plan only works if you stick to it. Automate your contributions into your 401(k), IRA, or other retirement account, so you don’t have to think about it.
Also, avoid dipping into your retirement fund — help your future self and leave that money there until it’s fully matured!