Yahoo Finance I’m a Frugal Self-Made Millionaire: Here Are 5 Savings Tricks To Make Sure You’re on Track for Retirement
No one wants to run out of money in retirement. And wealthier retirees can go broke just like everyone else — if they spend more than they can afford.
Also: I’m a Self-Made Millionaire: Here’s My Monthly Budget
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As a Certified Financial Planner and Retirement Income Certified Professional (RICP), Chris Urban has seen plenty of mistakes. But he’s also seen plenty of clients score huge wins, and he himself has bootstrapped his way to success as the founder of Discovery Wealth Planning.
Try the following six tips if you want to join the ranks of self-made millionaires on track for a fun and fulfilling retirement.
Wealthy people know the best money secrets. Learn how to copy them.
1. Take Advantage of Matching Contributions
“If your employer offers a matching contribution to their retirement plan, you absolutely should be contributing at least the maximum amount that they will match,” urges Urban.
“This is free money. If you are able to make additional contributions on top of this amount you should absolutely do it. I would focus on increasing your contribution amount as your income increases rather than necessarily focusing on your age. Having said that, once you reach age 50, you can make additional catch-up contributions.”
Matching contributions are a part of your compensation package. Ignore them at your peril.
Explore: I Retired in My 50s: Here’s My Monthly Budget
2. Automate Your Savings
We all run out of self-discipline and motivation sooner or later.
Urban has seen this play out time and again. “Set up an automatic savings program for accounts outside of your employer plan. If possible, create links and set up automatic transfers directly to various retirement, investment, or savings accounts and only have a ‘spendable’ amount of cash hit a ‘spending account.’ If you never see the money hit this account, you won’t miss it.
“Over time, you’ll become accustomed to spending only what you have while accumulating funds in various types of accounts for later in life.”
Don’t wait until tomorrow or next month or next year to set up automated savings, either. The younger you start investing, the less of your own cash you have to invest to build wealth.
“It’s important to remember the power of compounding. Contributing smaller amounts earlier in your career may be a bigger contributing factor than larger amounts later in your career, and this is because of the effects of compounding returns.”
3. Use Multiple Tax Strategies
“As you accumulate wealth, ideally, you want to save and invest in accounts with different tax treatment.
“For example, good tax diversification might mean you have a pre-tax account (such as a traditional 401(k) and/or IRA), an after-tax account (such as a Roth 401(k) and/or Roth IRA), and a taxable brokerage account.”
Urban acknowledges that some people, such as younger or lower-income workers, are likely better off investing entirely in a Roth account and vice versa. “Sure, if you are currently in the lowest or highest marginal tax bracket then perhaps spreading out your contributions might not make the most sense. However, once you get to retirement, you will have much greater flexibility with drawing down your assets (spending your money) in a tax-efficient manner if you have assets to pull from in accounts with different tax treatment.
“This allows for more effective tax bracket management, Roth IRA conversions, et cetera in years when your income is reduced.”
4. Slash Spending in Retirement
Once you approach or reach retirement, Urban recommends playing more defensively.
“When thinking about how to make your savings last longer in retirement, the two main areas to focus on are spending less and eliminating the risk of a catastrophic financial event.
“With regards to spending less, you could downsize your home or move to an area with a lower cost of living, either domestically or internationally.” Housing is, after all, the largest expense for most households. It offers the greatest room for saving money.
“You should also have a plan for legally reducing the amount of taxes you will pay over your remaining lifetime. Strategic tax planning is a key component of effective retirement planning.”
5. Fortify Against Financial Catastrophe
You could do everything else right, but if a major financial crisis hits you near or in retirement, you could lose your entire nest egg.
“With regards to eliminating (or at least reducing) the risk of a catastrophic financial event, I think first about healthcare. Ensure that you have the proper healthcare insurance (and, if applicable, supplemental coverages) to cover you and your family should you face a significant health event.”
Healthcare goes beyond medical insurance such as Medicare, however. “If you choose to self-fund for such risks as long-term care, ensure you have a dedicated ‘bucket’ of assets to pull from if needed.” In other words, keep a separate reserve of funds to cover these risks if you don’t insure against them. That prevents you from spending down your nest egg only to require long-term care that you can no longer afford.
What makes retirement planning so tricky is its unpredictability. Any of us could get hit by a bus a day after retiring — or we could live another 40 years. And those 40 years could be in good health with minimal extra expenses or in bad health with expensive care.
Think long-term to prepare for a low-risk, rewarding retirement.
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This article originally appeared on GOBankingRates.com: I’m a Frugal Self-Made Millionaire: Here Are 5 Savings Tricks To Make Sure You’re on Track for Retirement
