One of the biggest questions facing when improving your retirement savings is, “how much money will you need to retire?”
And once you realize that you need to change a few things to get there, you’ll be asking how to improve your retirement savings.
While it’s important to know your retirement number; not knowing doesn’t mean you shouldn’t start saving.
Saving systematically can improve your retirement savings success.
Rather than benchmarking your success on a single goal, you can simplify it with smaller and more attainable goals. Think of it like going to the gym to get fit. You wouldn’t walk into a gym, hire a personal trainer and demand a workout plan for the next 30 years.
Start working toward retirement with the mindset that you’re going to improve your financial life on step at a time. Systematically saving can build your wealth with the power of compounding.
Saving systematically is like rolling a snowball — the more you roll it, the bigger it gets and at a faster rate.
Now, in the case of improving your retirement savings, consider where you’ll save those dollars and how you can protect them.
Start a Roth IRA
The Roth IRA can be a great savings vehicle to compliment your retirement plan at work or personal retirement savings.
The Roth IRA also has a 5-year rule that makes it beneficial to start early.
The rule allows you to have access to the principal (which is the amount you put in) after five years penalty free.
While its primary focus is saving for retirement, you can access the dollars for an early retirement or another goal after the five years has elapsed.
The money you use from your Roth IRA will be tax-free in retirement which can help lower your overall income needs and potential taxes.
Consider the Roth IRA as a compliment to your traditional IRA and not a replacement. While taxes change and so may your lifestyle and spending habits, having both can offer flexibility.
Save into a Spousal IRA
Are you or your spouse a stay at home mom or dad? Or non-working spouse?
The Spousal IRA is for those who are married and have a non-income earning partner. It’s contributions to the non-working spouse’s traditional IRA that allows for additional deductions.
The contributions are limited to the amount of earned income or $5,500 in 2016 for spouses under 50 years old.
The Spousal IRA looks and acts just like a Traditional IRA. In fact, most broker-dealers don’t even label them differently on your account statements.
Build an Emergency Fund
Building an emergency fund can give you more flexibility and financial security.
An emergency fund is for expenses that occur when you least expect them. A loss of a job, disability or another financially catastrophic event that’s not entirely covered by insurance.
It can provide peace of mind and help relieve the pressure when making other financial decisions.
The emergency fund is best set aside in a separate account. If that’s not possible, then make sure it’s above your lowest balance in the bank at the end of the month.
It’s money you don’t touch unless you have no other choice.
If you don’t have an emergency fund, you can start by creating a plan to being saving for an emergency.
Do not invest your emergency fund in anything that involves a large potential loss, such as the stock market.
While you want you money to work as hard as possible, you also want to make sure you make smart financial decisions.
What should be the goal in an emergency fund?
Starting with 3-6 months of your current expenses is a good benchmark. Base the size of your emergency fund on at least the time frame your disability coverage will start if you become disabled. It’s usually the 3-6 months I just mentioned. It’s called the elimination period on your policy documents.
Think of an emergency fund as self-insuring for the short term. It’s a compliment to your insurance policy, not a replacement.
Review Your Protection Needs
Reviewing your disability, life, and other insurances can help protect your ability to reach retirement. Building wealth takes many hard working years but can be quickly destroyed financially with a catastrophic event.
Be the savvy professional you always dreamed of and get your insurance needs reviewed at least annually and during life changes.
Many households that do have disability coverage through work have only 66.67% of their income protected.
I don’t know about you, but our family would struggle on a 33% income deficit. But thankfully I have coverage.
In our experience, many people need more to live financially secure. It’s a similar issue with life insurance which covers only the balances such as a mortgage or other debts.
How much can you cut out of your financial life? It’s usually not as much as most people think.
Sure, you can move, sell your car, but really? Can you do any of these quickly? Your hard earned money could be devoured. All your retirement savings will be gone in a flash.
Know Your Retirement Date
Improving your retirement savings is not just about saving money. It’s about figuring out how to improve how you think about money.
Making improvements on where you put it and how to protect it are just as important as how to invest it.
It might be years before you decide on a retirement date, but it shouldn’t be years until you start saving.
Now Start Improving Your Retirement Savings
Systematically saving and protecting it can make the burden of retirement planning much easier.
Saving without a protection plan is a house without a roof. One without the other can put years of work at risk and ruin your retirement savings.