How to Wisely Save Money for Retirement

Budgeting is a happy occasion when you have planned wisely.

There is nothing scientific about saving for retirement. Most experts agree the best way is to pay yourself first out of every paycheck. A target proportion to save is 10 to 15 percent of gross income. This takes discipline and vision, but separates the will-haves from the won't-haves.

Things You'll Need

• Self-discipline

Instructions

1. Contribute the maximum to your 401(k) that the law allows, if you can. At least contribute up to any matching amount your employer offers. If you are serious about saving for retirement, you will allocate at least 10 percent of gross income to your 401(k) and arrange for your chosen amount or percentage to be automatically deducted from your paycheck so you will face no temptation to spend it.

2. Set up an IRA with monthly automatic deductions from your checking account if you don't have an employer 401(k)-type plan. Again, the automatic deductions force you to save for retirement instead of spend. Contribute the maximum amount, if possible, whether you have an IRA or a 401(k).

3. Invest your retirement savings wisely. You should diversify to limit risk. Choose a minimum of four types of mutual funds: aggressive growth, growth, growth and income and a balanced international fund. Adjust the proportions of each investment according to your age. If you are 60 or older, for example, invest less in the aggressive growth and growth funds and more in the growth and income sector. The regular investments (each paycheck or month) result in dollar cost averaging, which means you buy more shares when the market is down and fewer when it is up. So continue to save money for retirement when the market declines, because that is the best time to buy.

4. Change your ways if you are one of the many people whose spending exceeds income. It is critical that you start living within your means. Spending less than you make is the key to financial security. Get professional help if you need to learn how to live this way. The important thing is to start saving for retirement as early in your working life as possible to give your money more time to compound and grow.

5. Develop a plan to eliminate credit card or installment debt. Once your debt is eliminated, pay cash for everything. You will buy fewer and less expensive things, keep vehicles longer, and be able to put aside even greater savings for retirement. However, don't wait until your consumer debt is eliminated before you start to save for retirement. Start small if you have to, but make saving for your retirement a habit right away.

6. Watch your retirement savings grow and double according to the rule of 72. Divide the average growth rate you are achieving or expect to achieve into 72 and the result is the number of years it will take your money to double. For example, if you're getting an 8 percent annual return, your money would double every nine years. Seventy-two divided by eight equals nine.

Tips & Warnings

• Get started saving for retirement this month. Do not neglect this. You must develop the habit of saving and stick with it if you want to have a happy retirement.

• Don't worry about stock market ups and downs; you are in it for the long haul.

• You can't rely on Social Security. It will help, but it probably won't be sufficient for a decent retirement.

• Seek help from a professional financial consultant if you are in need of a detailed plan or are in financial difficulty. Whatever you do, don't spend your retirement savings before you retire.

References

• Ing Direct: Saving Smart for Retirement
• ABS: Retirement Strategies: The Future is Now