This is a post from Pauline of InvestmentZen.com
Sometimes, there seems like there is not enough money to do it all. Save for the next holidays, for a new car, to buy a house, send the kids to college,… it is a lot! So what do we do? We delay or reduce our retirement contributions. That is one of the worst things you can do to your future self. Why? Because you can ride that car for a few more years. Your kids can apply for college scholarships. You can skip Disney and go on a cheap road trip around National Parks. But when it comes to retirement? You’re on your own. Here are a few tips to save more, and the impact they can have on your nest egg.
It’s all about the returns
Let’s say you are about 30 years away from retirement. The main thing you have going for you is time. Time for compound interest to work its magic and make your money grow exponentially. But for that you need way more than the 1% your savings account is returning. And the closest thing to passive income there is is investing. You do not need to be an expert in the stock market to invest. As a matter of fact, few funds manager outperform the S&P500.
The index has returned 9.6% from March 1987 to March 2017, if you reinvested the dividends. For this example, let’s assume you get 8% net, by investing through a low cost robo advisor. Sometimes it will be more, sometimes it will be less. But over 30 years, you don’t care too much about market swings. To retire a millionaire 30 years from now, you would need to invest $750 per month. Seems like a lot?
Get that match
While finding $750 every month in your budget to invest can be pretty hard, once you take into account pre tax investing and company match, your paycheck should be reduced only a few hundred dollars. That is why before anything, you should aim at maxing out your 401(k) every year, or at least taking advantage of your company match. That is free money for your retirement!
Say your company matches $100 every month. Over 30 years, that adds up to $150,029. 15% of your retirement million efforts, just for putting the money in the right place.
Invest your tax refund
People often see their tax refund like a bonus from work, that they can spend freely. All the contrary. A tax refund is money you have overpaid to the state, hard earned money you should put to work instead of splurging on stuff you won’t remember in a year.
Think about it. The average tax refund is around $2,800. If you invest nothing else during the rest of the year, and put $2,800 every year into an index fund returning 8% for the next 30 years, you will have $330,303 for retirement. Just for transferring money you had already “saved” into another account. How is that for effortless retirement?
Have a saving challenge
Some people keep all their $5 bills in a jar, other invest all their unexpected windfalls, from family gifts to found money. If you save $1 on week one, $2 the next week up to $52 a year later, you will have over $1,300 to invest. Combine that with the tax refund effort and the free company match money, and you should be about 65% through your million dollar contributions. Saving is much easier when you know what you are doing it for. A challenge is great to get started with the habit of saving, then it becomes automatic.
Saving for retirement should be your number one priority, because no one else will do it for you. If you keep saving and investing regularly, you might even be able to retire early!