If you are receiving wages, tips, or salary, then you’re earning income. You should be contributing to your retirement plan, whether it’s sponsored by your employer, or yourself as a small business owner. Whether you’ve been in the workforce a while or you’re just starting out, it’s never too late to improve your saving and investing habits. Here are 4 steps you should be taking to maximize your savings and grow your wealth, preparing you as much as possible for a worry-free retirement.
1. Get the free match. Most employers offer a free contribution match which can vary from 3-6%. The only requirement to receive this match is that you must be contributing at least that much to the plan yourself. This is free money, and yet I still encounter people who choose not to receive this free benefit because they’d rather get a little bit extra to spend every month. 3% of a $50,000 salary is $1,500 a year. Invested for 30 years with an average rate of return of 8% equals $169,924. That’s a lot of free money so take full advantage of that benefit!
2. Contribute as much as you can. Generally, you want to be investing at least 10% of your household income into retirement, but 15% is even better. The more you save, the faster your money can grow and then the power of compounding interest kicks in. If you invest $18,000 a year (15% of a $100,000 household income, plus a 3% company match) for 30 years with an average rate of return of 10%, you’ll have $2.96 million, not too shabby!
3. If you’re a small business owner, start a SEP or SIMPLE IRA. I meet business owners all the time who are excellent at what they do, but need help planning for retirement. Making an excellent income isn’t enough if you aren’t setting some of it aside for the future. The danger is for those entrepreneurs who only make money when they are doing the work. When it comes time to retire, they only have Social Security benefits which may not be enough to sustain the lifestyle they are accustomed to. Taking the time to set up a SEP or SIMPLE IRA and contribute to it regularly is a game-changer for such entrepreneurs and small-business owners.
4. As your income grows, increase your saving. If your saving habits aren’t where you want them to be, you can increase savings when you get a raise or unexpected income. When you immediately allocate these increases to savings it reduces the temptation to spend more on discretionary items than you should. This will prove to be very beneficial for you in the long run.
These are four simple steps you can take to better prepare yourself for the future. For more information or help implementing some of these ideas, contact us at American Financial Planning today!