How to Save for Retirement

Money Girl has 3 cheap ways you can save for retirement. Learn how to leverage your money so you save less, but get lots more in retirement!

Laura Adams, MBA
5-minute read
Episode #177


Many of us dream about our retirement years; maybe you want to do a lot of traveling, or move to that beach house you always wanted. Unfortunately, your retirement dreams won’t become a reality without proper planning and preparation. In this post I’ll give you three important tips about how to prepare for a blissful retirement the cheapest ways possible.

How to Prepare for Retirement

Life can throw lots of problems at us; therefore, I preach hoping for the best, but planning for the worst. Even if you sock away a reasonable amount of money for the future, unexpected financial challenges can be a road block to retirement. A disability, chronic illness, or legal battle, for instance, could leave you swimming in debt and be a real drain on your retirement funds.

It used to be that workplace pensions—the kind where an employer guarantees you a set amount of income for the rest of your life—provided a nice cushion. But those types of retirement benefits are on the endangered species list. What about Social Security? Wasn’t that created to guarantee us some level of, well, security? It’s important to understand that the 75-year old program was created to be a supplement for retirees, not a sole source of income. However, close to 25% of all retirees who receive Social Security benefits live on that check alone. As the program gets closer to paying out more money than it takes in, the future for Social Security doesn’t look good.

So how do you make sure that you’ll have enough money for retirement? The average American will need enough to live on for 20 years after they end their primary career. Here are three ways to bridge the gap between today and your dream retirement with as little pain and expense as possible:

  1. Start saving early.

  2. Take on as little debt as possible.

  3. Never take early withdrawals from your retirement savings.

Why You Should Start Saving for Retirement Early

You can actually save less money but still have a massive retirement account, if you put time on your side.

I’ll explain each of these tips with an example so you’ll fully understand their power. Let’s start with saving early. It’s so important to get a jump start on your savings because the sooner you begin, the more time your money has to compound or grow. You can actually save less total money and still have a massive retirement account, if you let Father Time work for you. And by the way, saving “early” doesn’t mean starting a few years before you want to retire! Early means as soon as you start earning money. If you haven’t already heeded this advice, it’s never too late to get on a better financial path.

Consider this example: Early Elena starts investing $200 a month when she’s 25 years old. She puts money in a pretty hum-drum index fund that averages an 8% annual return. When she’s 70 years old, she’ll have an impressive $1.06 million dollars to fund her retirement lifestyle due to the incredible power of compounding interest. Nice! But her friend Late Larry doesn’t get on the savings bandwagon until he’s 35. He also puts $200 in the same fund that Elena invests in each month, but when Larry’s 70, he’ll only have $460,000. Okay, but not as nice as having over a million dollars.

By procrastinating saving $200 each month for ten years, Larry invests $24,000 less than Elena, but that gap ends up costing him $600,000 in retirement! Did you get that? Delaying investing for ten years means that Larry will have $600,000 less to spend in retirement than Elena. I don’t know about you, but the idea of investing $24,000 over a ten-year period to have an extra $600,000 in retirement, is well worth it to me! When it comes to investing for retirement, the early bird gets handsomely rewarded.

Why You Should Avoid Debt

The second tip that I mentioned for the best way to prepare for retirement is to take on as little debt as possible. That’s because paying interest on debts like credit card balances, payday loans, and car loans, is expensive. Financing any purchase drastically increases its cost—and that leaves you with less money to save or invest for your retirement.

Here’s an example: Let’s say you buy a car for $25,000 and finance it for six years at a 10% interest rate. The total price you’ll really pay for the car is over $33,000—and that’s if you have decent credit. If you have poor credit, your interest rate could be doubled, which means that same car could cost you $43,000 or more. Even when you buy something on a credit card, like a suit for work, you could end up paying double or triple the amount for it, depending on your card’s interest rate and how long it takes you to pay off the balance. Paying unnecessary interest is just like tearing up your cash and throwing it out the window instead of saving it for your future.

Why You Should Never Take Early Withdrawals from Your Retirement Savings

My third retirement tip is to never take an early withdrawal from your retirement savings. That’s especially true when you invest in tax-advantaged accounts like IRAs, 401(k)s, or 403(b)s, because they impose an early withdrawal penalty. Not only will you end up with less to spend in retirement when you withdraw those funds, but you’ll have to pay the government a 10% penalty. Ouch. Again, that’s money that could go toward your financial security, instead of watching it evaporate from your retirement account.

More Tips on Saving for Retirement

And one last quick and dirty tip (that you’ve heard me say before, if you’re a regular reader) is to always participate in a retirement plan offered at work. Plans like 401(k)s and 403(b)s have high contribution limits, are convenient, have great tax breaks, and may give you some free money if you’re offered matching funds by your employer. All those great benefits can make a big difference in the amount you’ll accumulate over time. And if you don’t have a workplace plan, IRAs are the next best way to go. Be determined and committed to make sure that you’ll have enough to fund a great retirement.

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More Resources:

Social Security Administration

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About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura's previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.