Hoping to have financial security in retirement? Social Security won't provide it, so you'll need to take steps throughout your life to make sure you have the money you need. The sooner you start making financially responsible choices, the easier it will be to set yourself up so you're flush with cash as a senior.
Not sure where to start? Here are four things to begin doing today.
1. Living on a budget
Living on a budget may seem like a drag. Unfortunately, if you're not doing it, chances are you don't know where your money's going, and are overspending on things that won't help your future. You need to give your dollars a job -- and one of those jobs needs to be saving for retirement.
There are different kinds of budgets, and the right one will depend on your situation.
If you feel constrained by too much planned spending, try the 50-30-20 budget. This budget involves limiting needs to 50% of your budget and wants to 30%, and saving 20% of income. Having a budget with broad categories can work well if you're pretty good about keeping discretionary spending to 30% of your income -- or you save 20% first.
But if saving 20% seems impossible or you find yourself regularly overspending, you'll need a more detailed budget. Start by tracking spending for around 30 days to see where money's going. Then decide how much you should be spending on different things such as housing, transportation, entertainment, food, clothing, and retirement savings. Rework the numbers until you're allocating an appropriate amount of money to each type of spending -- and to savings -- and your total budgeted spending and savings don't exceed your income.
2. Automating payments to retirement accounts
Automating payments is also key to a secure retirement. If you have to force yourself to manually transfer money to retirement accounts every month, you often don't end up doing it. The money gets spent on other things.
But if you automate transfers on payday before you ever see the cash, you don't have the choice to do anything else with it. Money goes where it needs to, you can't spend it, and you'll have to make do with what's left over.
If you have a 401(k), talk with your plan administrator to set up automatic contributions. If you have a retirement account with a brokerage firm, set up automatic transfers either through your brokerage account or your bank account.
Living on a budget helps with this, as you'll know exactly how much you can have automatically transferred without ending up with too little left. Budget to transfer at least 15% of income to retirement automatically to ensure you have enough to be comfortable as a retiree.
3. Paying down debt
If you're in debt now, some of your money is going to interest instead of being invested for retirement. If you're in debt as a senior, things will be worse. You'll be living on a fixed income, and a big portion of your Social Security or withdrawals from retirement accounts will end up enriching creditors.
Your goal should be to pay off debt ASAP, and you can do that by making a debt payoff plan.
Two common approaches are proven to work: the debt snowball and debt avalanche. The debt snowball involves paying off debt with the lowest balance first, while the debt avalanche involves paying off higher interest debt first.
With either approach, make minimum payments on all your debt and extra payments on the debt you're trying to pay down. Once that debt's paid off, add everything you were paying on it to the minimum payment on the next debt you're working on. Keep going until all your debt is gone.
You'll have to decide which debts you should focus on paying off. Generally, paying off a mortgage and student loans early won't make sense because interest rates on these debts are lower than returns you could earn from investing. Plus, you get a tax deduction for student loan interest (as long as your income isn't too high) and for mortgage interest.
But higher interest debt, such as credit card debt, should be paid off ASAP.
4. Learning about investing
Finally, you need to learn at least the basics of investing your money. If you don't put it into the market and just leave it in a savings account, it will continually lose value due to inflation. Even if you put your money into bonds or CDs, it will be difficult or impossible to save enough to build up a big retirement nest egg.
The higher your return on investment, the less money you need to save to end up with enough. If you save $500 monthly and earn 7% annual returns, you'd have around $715,000 saved after 32 years. If you started saving at 30, you'd probably be OK to retire at 62. But if you earned only a 2% return on investment, you'd need to save around $1,325 per month to save a similar amount of money -- which is a lot harder!
Of course, you also need to know how to balance risk so you don't lose everything chasing unrealistic gains. To do that, learn how to diversify your portfolio by investing in a mix of different assets.
You'll also need to figure out how to pick safe investments. If you don't want to learn how to select individual stocks, you can put together a portfolio of Exchange Traded Funds or mutual funds. You can find out more about ETFS and mutual funds here. You could also use a robo-advisor, but there's a fee -- and this may be unnecessary if you can just learn some of the basics of investing in funds.
Financial security as a senior is within reach
Now you know four key steps to take today to become financially secure as a senior. Jump in and take action now. You'll need the money in your golden years, and you'll be happy you acted when you have funds to live comfortably without financial worries in retirement.