Ask a random person on the street when he plans to retire and there’s a good chance he’ll respond with a laugh and “Never!” No surprise there, given that in 2013 the average retirement account owned by someone 55 or older held just $104,000.
But it doesn’t have to be that way. As I detailed in my book, You Can Retire Sooner Than You Think, millions of Americans are leaving their careers before 65 with more than enough money to live their dreams. Their secret isn’t really much of a secret. It really boils down to this: Start saving early and be disciplined about money. Here are 9 ways to make that happen. I’ll be honest – there’s a lotta “no, duh” stuff here.
Start early. Thanks to the phenomenon of compound growth, time can be a powerful ally. Compounding is the accelerated growth in value that occurs when the earnings generated by an investment are reinvested and produce even more earnings. Time is critical to this process. The longer an investment can simmer on “compound” the fatter it will grow as it feeds on earnings on earning on earnings. Starting to save for retirement in your 20’s will make a huge difference in the size of your nest egg – and how much you need to contribute to get to that $1 million mark.
If you get started at age 25, you need to save just $5,346 per year to reach $1 million by age 65, assuming a 6.5% average annual growth rate. But if you don’t get going until age 35, you must sock away $10,871 per year to meet that goal.
Boost your income. This is one of those obvious ones. The more you earn, the more you have to save. Have you maximized your earnings potential by getting additional training or education? Do you actively seek promotions? If your field pays modestly, have you considered a new line of work?
Take the free money. Enroll in your employer’s 401K and contribute up to the maximum the boss will match. Your contribution is tax-deferred and someone is giving you money just to save your own money. This is called a gift horse. Don’t look it in the mouth.
Minimize the tax hit. Most of your retirement savings should be in tax-advantaged accounts like a 401k, IRA or Roth IRA. Again, fund that 401k to the max match, then start putting money in either an IRA or Roth IRA, depending on your circumstances. A financial planner can walk you through that decision.
Take some calculated risks. Any good poker player will tell you that scared money don’t make money. Cash and bonds are super safe but pay minimal returns. Stocks and real estate involve more risk but traditionally provide a good return over the long term. Think about how much you are comfortable with, and take a few smart chances.
Stay informed. You can’t make smart decisions about your investments, including when and how to tale some risk, unless you understand the potential investment and what’s currently happening in the market. You need to put at least as much effort into learning about your investments as you do prepping for your fantasy football draft. More, actually. Seriously.
Marry the right person. No, that doesn’t mean marrying for money – although that’s a time-honored tradition and we won’t judge you for it. This really means that you need to partner with someone who, broadly speaking, shares your financial views and goals. This is about more than building wealth. Money disputes are at the root of much marital discord and divorce.
Get out of debt. Owing money is a drag. It limits your options and sucks up money for interest payments that could be used for savings or other wants and needs. Prioritize paying off your credit cards and other consumer debt – especially if you are nearing retirement.
Hold off on Social Security. You can start getting benefits at 62, but your monthly benefit will growth every year that you wait up to age 70. Many factors will go into this decision, including your health and expected longevity, but try to wait until you really need the income. Consider getting a part-time job to help supplement your nest egg until you start getting Social Security.