Early retirement has (apparently) become the millennial dream.
According to a survey by Finder though, a whopping 70% of those Millennials surveyed wish they had started saving for retirement earlier, whilst 17% believe that retirement isn't on the cards for them at all.
If these statistics alarm you because you quite like the idea of Caipirinhas on the beach in your early sixties, then these five tips can help you on your way to retirement bliss.
Estimate your future spending
If you are thinking about your retirement then chances are you’ve already made a monthly budget and are involved, for the most part, in where your money is going. This handle on your monthly finances will come in handy when you try to ascertain your potential future spending.
Remember that whilst you are calculating this projected figure, your every day costs – such as your mortgage, bills, savings, etc. - will differ slightly from what you are paying now. For example, it is likely that by the time you retire you will have paid off your mortgage and so will no longer need to take this into account. Likewise, any costs associated with having young children living at home will also be able to be discounted. There are a number of great custom designed calculators out there to help you find this magic number.
Whilst this is obviously not an exact science, by building up an estimated figure you will develop a more concrete understanding of exactly how much money you need to save in order to retire. It’s too easy to ignore the uncomfortable facts until you actually sit down and crunch the numbers.
Save and Invest
The only way to achieve your goal is by putting in the legwork. Once you’ve earned your money you need to learn the best ways to save and invest it so you can get the most out of it.
Using the 50/30/20 rule you can start to put away 20% of your monthly income into savings or investment accounts. With savings, always try to find the most beneficial interest rate that will give you the maximum amount of return on your cash.
Whilst there are a number of different ways you can choose to invest your money, it is always wise to keep in mind that the longer you leave your investments, the more likely it is that you will see significant returns. Importantly, you do not invest in order to “beat” the market. Instead, you should aim to invest so that your money grows above the rate of inflation and helps you build a small nest egg for the future.
Understand your taxes
The more that your savings and investments increase in value, the more important it is to fully understand the tax implications. Depending on where you live and what investments and savings you make, your taxes will vary.
In the UK each citizen has a PSA (Personal Savings Allowance) which is the amount of money you can save each year that is exempt from tax. All money put in an ISA (Individual Savings Account) is also tax-free (within certain parameters). For more information about taxes to be paid on specific investment and savings accounts, refer the British Government’s Money Advice Service website.
Live within your means
Whilst this may seem like simple common sense (and great if it does!), it can actually be harder to achieve than you think. Living within your means doesn’t just mean staying in the black at the end of each month, it means being able to make significant savings, investments, and paying off debt whilst you do it. It also means sticking to your guns regardless of any external influences.
This means that you learn to live a certain lifestyle and you don’t alter it, no matter what temptations emerge. If you inherit money you don’t spend it on a holiday but instead squirrel it away in investments. If you earn a bonus or a raise at work you don’t alter your lifestyle to match the new income, but rather, put that extra money away into savings.
Get debt free
Debt increases over time, meaning that the longer you don’t pay it back, the more you will end up having to pay. If you have debt you can’t save money in any meaningful way, so the most important thing you need to do is to eradicate your debt so it doesn’t stop you saving for your retirement.
So, where possible, avoid car loans, credit cards, store cards, and any other miscellaneous debt that will weigh you down with unnecessary interest rates. For the debts that many of us cannot afford (such as mortgages or students loans) try to pay them off as quickly as possible to they do not impact on your future.
Your capital is at risk, and past performance may not be a reliable indicator of future results. Oval Money is not permitted to provide financial advice, and if you have any questions please consult an expert.