Saving for retirement is an essential link in the wealth-building chain. Taking in to account the need to save for the future while you are still young will help you avoid many headaches as time progresses. There are numerous rules out there which are said to be crucial for helping you retire successfully. However, some of these rules could potentially be deviated from and result in positive effects in regards to your retirement.
Rule #1 It is Vital to pay off your Mortgage before you Retire
It seems logical to believe that if you plan to reside in the same home after retirement, you should attempt to completely pay off your mortgage beforehand. By doing so, it is assumed that you will have less expenses taken out of your monthly budget. Nevertheless, the extra cash you presumed you would have after the mortgage was paid off may have to go towards other expenses. Without your mortgage, you are no longer eligible for mortgage interest deduction at tax time. If this deduction is gone and you do not have other deductions which can be itemized, you may find yourself paying more taxes than originally thought. This is especially true if you plan for your tax bracket to increase during retirement.
Rule #2 You should Completely Pay off your Debts before Saving
The majority of people who earn a college degree obtain a large debt. As a matter of fact, in 2013, 70% of college students had massive students loans. These loans are something which can potentially hang over your head years after you have left college. Therefore, it stands to reason that ridding yourself of that debt should be a number one priority, even over saving for your retirement. After all, the sooner you pay off the debt, the sooner you can start saving, right?
While it may seem like a good idea to pay off your debt sooner by paying more than the monthly amount owed, this could potentially hurt you in the future. For example, if a college graduate is presently making $40,000 annually and owes approximately $25,000 in student loans, they will need to pay $280 monthly to rid themselves of this debt in 10 years. If their interest rate is 6%, the grand total paid toward their loans will be $33,000. It would seem logical that if an extra $50 per month is paid, you could cut that time down and save almost $2,000 in interest. Thinking about the savings, that seems great.
Hypothetically, if instead that extra $50 was put towards a 401(k), after 40 years, a person would have a grand total of $80,000 saved for retirement. If you decide to wait until your college debt is completely paid off, you will significantly cut down on the money you have saved for your future retirement.
*The hypothetical examples above are not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.
Rule #3 A person should save approximately $1 million in order to retire comfortably:
Becoming a millionaire in retirement sounds amazing and many experts say this is the goal to which you should strive. However, the problem with simply striving for a general number is that it doesn’t take into account what you personally will need for retirement. For some people this number would be an abundant amount, but it all depends on the individuals and specific factors which will play into their retirement life.
Things to look at when attempting to set a goal for your retirement fund are factors such as where you want to live, if you will rent or own, your anticipated medical bills, how much you are expecting to receive from Social Security. Analyzing these factors will better help you decide upon a retirement goal that is in line with your future plans.
One Rule to Always Follow:
Although there are some rules concerning saving for retirement which are not concrete, there is one which always remains true. A retirement fund is not something you invest in once, it is something you must commit to invest in on a regular basis. Setting aside a specific amount of money consistently will work toward helping you to create a more financially secure retirement.
*The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. Investing involves risk including loss of principal. No strategy assures success or protects against loss.