Whether or not you wish to keep working, you should start saving for retirement as early as possible in order to set yourself up for financial success. The sooner you start saving for retirement, the less you will need to save. The goal is to build up a solid nest egg that you can live off of comfortably in your golden years. A well-thought-out retirement plan will grant you more control over your finances and your way of life.
Get Your Social Security Benefits
Social Security is a program in the United States that provides retirement benefits, survivor benefits, and disability income. This can be for older adults, retirees, those whose spouses have died, and people who are unable to work due to a disability. Anyone over the age of 62 who has paid into social security for at least 10 years is eligible to receive these benefits.
Social security is meant to supplement your income when you go into retirement, though it is also important to be a wise saver prior to retirement as well. The extent of these benefits will depend on your age, your income when you were paying into the program, and more.
While you work, part of your taxes is paid into the program, which is used to pay those who are currently depending on this program and its benefits. There is also a contribution limit on what you can pay into social security and any amounts you pay through taxes.
The Most Important Ages for Retirement Planning
While you can start receiving social security retirement benefits when you are 62 years old, these benefits are lower than if you were to wait for your full retirement age. Full retirement age is typically 66 or 67, though it depends on the year you were born.
Once you start drawing social security benefits, you will receive those payments for life. At least half of Americans depend on social security for part or all of their retirement as a form of a public pension. The formula for determining your benefits is based on your lifetime earnings and an average of your highest earnings.
Choosing what age to start receiving benefits is an important part of your retirement plan. You can continue working once you have started drawing these benefits, and working while you receive them may actually increase what you receive, especially if you work past your full retirement age. Some people choose to start receiving social security benefits at age 62, though the benefits are lower since they are not the full retirement age. Other people choose to delay retirement and delay receiving these benefits. If you wait until after your full retirement age, your benefits may be higher.
The most important age is when you choose to start drawing social security retirement benefits. The second most important age is when you start planning for and developing retirement goals.
Planning Your Retirement Goals
Retirement planning takes diligence and discipline, whether you want to retire early or not. A financial advisor can help you start planning for retirement at any time so you can build up your retirement savings for your future. Most people are not independently wealthy and need to develop a well-thought-out plan to enter retirement without any debt. If you plan ahead, you may be able to take advantage of popular savings accounts for retirement, like a Roth IRA. This individual retirement account (IRA) taxes your retirement savings on the way into the account instead of on the way out, saving you money. Your employer may also offer contributions or a matching program. You may also qualify for certain tax breaks that will help as you plan for retirement.
In your thirties and forties, your contributions to your retirement fund may be limited by your income and expenses. This is true especially when you are focused on paying down debts like student loans and a mortgage.
At age 50, set a goal to start increasing what you put toward retirement savings. Many types of accounts that focus on retirement preparation also allow for increased payments into retirement savings accounts. Aim to max out your contributions to your accounts each year. By age 55 (or earlier), you should start discussing a retirement plan with a certified financial advisor.
Understand the benefits and drawbacks of Retirement Accounts
These accounts are a great way to save for the future, though they can also come with drawbacks. The most popular type of retirement account is an individual retirement account (IRA).
There are two kinds of IRAs: traditional IRAs and Roth IRAs. These types of accounts are relatively easy to set up and come with certain tax advantages, but there are limits to the amount you can contribute. IRAs also have penalties if you withdraw funds before a certain time.
IRAs were developed as a way for people to start saving for retirement on their own. They are separate from pension plans that were popular in decades past. Both types of IRAs typically have limits on contributions. They can also have penalties and requirements regarding withdrawals.
When you contribute to a traditional IRA at an early age, the money going in will not be taxed. However, the money you withdraw during your retirement years will be taxed. With a Roth IRA, you don’t pay taxes once you start drawing from this type of account (after the age of 59 ½) because it was already taxed on the way in.
5 Keys to Early Retirement
Early Retirement Planning
If you want to benefit from retiring early then you need to start planning now. You can start this process by meeting with a financial planner. Discuss your retirement goals and calculate how much you need in order to retire comfortably. Planning for early retirement might involve cutting down on your monthly expenses so you can save and invest in your future.
Understand the important milestones for your ideal retirement age. Know when the best times are to begin drawing social security retirement benefits, and learn when to utilize your individual retirement account. While you can start taking social security benefits at age 62, talk with your financial advisor about what age is best for you and your specific circumstances.
Living on Less
In order to plan for an earlier than normal retirement, you might need to live on less in the present. That way, you can contribute more at an earlier age to your individual retirement account. This helps you build up your wealth for retirement. When you are able to live on less at a young age, you can take advantage of the benefits of an early retirement plan.
Set a Goal
Set a goal for yourself in terms of what amount of money you wish to have when you retire. Setting this goal will allow you to determine monthly and yearly contributions that are necessary in order to meet this goal at your ideal retirement age.
Compound Interest Is Your Friend
The earlier you start to invest in your retirement, the more you can take advantage of compound interest. Compound interest is extremely powerful and best illustrated with an example:
Let’s say Jenna, age 20, invested $1,000 today. If she didn’t touch it until she retired at age 70, her money could increase by 32 times — meaning she could end up with around $32,000. (This assumes a 7.2 percent growth rate, which is reasonable “based on the historical, long-term returns of U.S. large-cap stocks.”)
Now a small tweak. If Jenna were to invest that $1,000 at age 20 and contribute $83 a month (around $1,000 a year) until retirement, then by age 70, she’d have $465,000.
Bottom line: invest early and continue to make small contributions to see massive results.
How to Get Rid of Debt
Understanding your entire financial situation can help you get rid of debt faster. Setting both short-term and long-term goals will help you decide how you can best allocate your financial resources. Getting rid of debt may mean you need to live off of less now. This lets you pay higher amounts toward your debt, getting rid of it faster. Take advantage of any tax breaks and interest-free options for paying down debt without accruing a higher balance. A financial advisor can work with you to develop financial goals that will help you get rid of debt. This will help you contribute more toward a retirement and savings account sooner.
Speak with a Financial Professional Today
Are you ready to start saving for early retirement? Or do you feel like you’re behind and have some catching up to do? Either way, get in touch with Momentum Wealth Management. We offer advice on financial planning, investments, savings plans, and much more.