When you think about saving money for your retirement, do you cringe or feel optimistic? For some people, saving creates a feeling of accomplishment and pride. Others feel stress, even fear, because they haven?t begun to sock away savings.
Regardless of where you stand, one thing is certain: You deserve to feel secure. And using your paycheck to fund your future will start you on that path. So, put your savings on autopilot and watch your retirement savings flourish.
TAKE ADVANTAGE OF WORK RETIREMENT PLANS
Does your employer offer a defined contribution plan such as a 401(k), 403(b) or 457? Contributions from your paycheck go directly into these tax-advantaged savings vehicles so you don?t have an opportunity to spend it first. Also, many employers offer to match your contribution up to a certain percentage, which is like getting free money for your retirement.
If you?re already contributing to a defined contribution plan, also called a qualified plan, but feel you can save even more, you might want to consider funding a Roth 401(k) if your employer offers this option. Each of these plans offer different tax benefits. In a traditional 401(k), you contribute income pre-tax and then pay taxes on the funds when you withdraw the money in retirement. Roth 401(k)s are funded with post-tax income so you pay the taxes up front and then make withdrawals tax-free during retirement.
You can use an allotment to divvy up your paycheck and send a specific dollar amount to separate bank accounts at each pay cycle. This autopilot savings plan can be set up by your human resources department. Some people use this approach for short-term goals like saving for a vacation or longer-term goals such as saving for a down payment on a home.
You can also ask your bank to set up regular transfers from your paycheck to your savings account. Doing so eliminates the temptation to spend because the money is moved to your savings account without you even noticing.
TWEAK YOUR TAXES
Do you look forward to a significant tax refund in April? If you?re receiving a refund of more than $1,000, your W-4 tax forms might be in need of a tuneup. Review your tax status with a professional to determine whether you can increase your withholding allowances, which will also increase the money in your paycheck each pay period. You?ll get a smaller refund, but you can bank the extra money in your paycheck throughout the year.
Some workers don?t realize that a hefty tax refund means that they?ve overpaid their taxes, thereby granting the government an interest-free loan with their money. For those who choose to collect a big refund, consider depositing that check into a savings or retirement account.
DOUBLE THE TAX
Get creative with your approach to saving part of your paycheck so that when you?re tempted to splurge, you remember that you?re doing something good for yourself long term. For example, try using the tipping standard of doubling the sales tax to tip yourself and serve up a healthy nest egg. Look at how much of your paycheck is going to various taxes; total them and use that figure as a monthly savings goal.
BANK YOUR BONUS
If you get an annual or quarterly bonus, you might be planning to use those funds for a beach vacation or to buy expensive electronics. Consider putting at least 50 percent of your bonus into your retirement account and save a bit on taxes.
SOCK AWAY EXTRA PAYCHECKS
If you?re paid every two weeks, that means you receive 26 paychecks in a year. This cycle actually generates two ?extra? paychecks each year because you collect three paychecks instead of two in each of two months. Stashing those two paychecks into a savings account would be great, but if you think it?s not doable, consider this. Let?s say that your paycheck is $2,000. Divided by 12 months, that equals $166 a month. Why not set up an additional allotment at work, or automated savings at your bank, for $166 each month?
At the end of the year, you?d have essentially saved a full paycheck. Saving three to six months? worth of your living expenses in an emergency fund is an important financial goal. Saving at least 10 percent of your annual income is a baseline retirement savings goal.
HOW TO ADD MORE THAN $400,000 TO YOUR RETIREMENT FUND
Based on a $60,000 annual salary with a goal of saving 10 percent ($6,000) a year, you would need to save $230.77 a pay period in a 26-pay-period environment. If you invest $6,000 per year at an estimated 5 percent interest rate in an uninterrupted compounding interest account, you could save more than $400,000 in 30 years.
By following these easy savings strategies, you could be well on your way to a secure future. When you analyze your earnings statement and budget with your retirement in mind, you can use your pay periods, direct deposits and other tools to your advantage to create a customized financial plan.