A Late-Starter's Guide to Saving for Retirement |
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How to Increase Your Savings
The four methods late starters can use to increase savings are:
- Reduce expenses
- Increase income
- Convert current assets into investments
Many of us have had retirement funds and spent them. Emergencies and unexpected shortfalls invariably come up. Therefore, it's essential to get into the habit of preserving current savings, or you will have little chance of ever increasing your savings. This is why a cash reserve fund is essential. Before you can start saving for retirement, you first have to set aside enough money to cover three months' worth of expenses for emergencies.
Curb Expenses
So where do you get three months' expenses while you're trying to save for retirement? Start by reducing expenses at your current income. The best approach is to establish a plan to keep income out of your hands and out of your checking account. Automatic withdrawals from your paycheck into savings accounts and tax-deferred retirement accounts like 401(k) plans put a barrier between you and your money. (In addition, tax-deferred retirement accounts reduce your taxes so you can save more. Many plans also include employer matches, which can double your contributions without increasing your taxable income.)
For example, Tracy and George feel they would be comfortable living in retirement on $54,000 rather than their current $72,000. If they began living that lifestyle now and had $18,000 a year deducted from their paychecks and placed in savings and tax-deferred retirement plans, they'll soon find their future looking more secure.
Boost Your Income
Take our other example, James. Since he doesn't want to reduce his lifestyle now or during retirement, he'll have to concentrate on increased income to meet his retirement goals. He has several options:
- If he finds a new employer with a good pension plan, he can negotiate for the same take-home pay with an increase in income going to his retirement.
- If he can get a raise from his current employer, he can have the raise diverted directly to an IRA or savings account.
- Most importantly, James needs to be flexible. His best opportunities may be out of the city or state or even out of the country. Many older Americans find their skills more valued in the catch-up economies of Asia and Latin America than at home. Whatever the situation, if James is willing to move to a different job in another country, he may be able to create enough savings to return home in retirement and live the life he wants.
Can You Do Both?
The more difficult path is to both reduce spending and increase income. Only late-starters desperate to create retirement savings should try this. Both approaches cause disruptions in your life and often have emotional consequences. Dangling more money in front of yourself, yet spending less than before, often requires superhuman restraint and something like a spiritual awakening.
Next: Converting Assets >
Can You Save Enough?
Try this ThirdAge calculator to see how much your savings could be worth at retirement.
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