The following is a guest post from David Chen at MillennialPersonalFinance.com.
Are you worried you might not be saving enough for retirement? As a recent college graduate, retirement seems like a distant dream that you can always start saving for tomorrow. Eventually, tomorrow will be the last day of your working career and you will need to rely on the money you saved for retirement. If you do not feel like you are saving enough at the moment, these are a few lifestyle choices to make to save more for retirement.
#1: Save At Least 10% of Each Paycheck
It’s recommended that you save at least 10% of your monthly income for retirement. You can do this by contributing to your employer 401k or an individual retirement account (IRA) that allow your contributions to grow tax-advantaged.
If you are near 30 years old, instead of 20 years old, you should plan to contribute 20% to “catch up” if you didn’t save any money for retirement during your first decade in the workforce.
#2: Max Out Your Employer 401k Match
Our grandparents most likely received a pension from their work when they retired. To reduce costs, employers shifted to a defined contribution retirement plan where they help fund a small fraction of your retirement benefits instead of the majority with a pension system.
If you employer offers a 401k match (i.e. the first 6% of your income), contribute at least that amount to get the full match of “free money” from your employer. After meeting the match, you can contribute more to the 401k if you like the investment options and low costs, or, contribute to a low-fee IRA instead. This is a good option because it is often hard for some people such as Millennials to start saving for retirement compared to older generations.
#3: Automatically Save Your Salary Increases
Each time you get a pay raise, put the extra monthly income into your retirement account. Instead of succumbing to “lifestyle inflation,” learn to live on your current salary instead of immediately spending the extra income on one-time purchases. This is possibly one of the easiest ways to save for retirement without having to cut your current spending.
#4: Increase Your Income
Depending on the lifestyle you want to live in retirement, you may have to contribute more than 10% of your income to avoid outliving your savings. An easier solution might be boosting your income if you currently cannot save more than 10% at your current salary. For example, 10% of $100,000 is larger than 10% of $50,000.
#5: Stay Out of Debt
If you are in debt, a portion of your monthly paycheck is set aside for a loan payment. By having a high debt-to-income ratio, you might have to contribute less than 10% for retirement to afford the monthly payment. Remaining in debt for your entire working career means you will have a hard time saving for the future. Some baby boomers are experiencing similar difficulties as they are becoming increasingly affected by student debt.
When you borrow money, make a plan to pay it off as soon as possible. Most lenders do not assess a penalty if you repay your loans early and you can potentially save thousands of dollars in interest charges. Once you are debt-free, use the money that once went to the monthly payment to be saved for future large purchases to avoid future loans and extra retirement account contributions.
#6: Refinance Your Current Debt
If you currently have high-interest loans from credit cards, student loans, or anything else, refinancing debt for a lower interest rate can also save you hundreds or thousands of dollars over the life of the loan. And, you can also prepay these loans without fee-free as well. If you are trying to refinance debt, you’ll have to think hard about your options. For instance, consolidating credit card debt is typically only worth it if you can get a lower interest rate overall. Another example: refinancing student loans may sound like a good idea, but you could end up losing important benefits on your old loans, especially on federal student loans.
#7: Reduce Entertainment Expenses
Whether you are single or married with a family, everybody likes to have fun. One of the rewards of working hard is the ability to afford entertainment by going out with friends on a Friday night or going to the local sports game. Take a moment to see if you might be spending too much.
It’s recommended that you spend no more than 5% of your income on entertainment expenses. If you are spending more than you should, reduce your entertainment spending and apply the difference to your retirement account. You will literally by living for tomorrow instead of living for today.
Saving More for Retirement Is Possible
At first, many of these lifestyle choices might seem hard. It’s very easy to spend the bulk of your paycheck on today’s expenses because life is expensive between student loans, a home mortgage, starting a family, and still having fun with friends. It’s still possible to do all these things, but, by keeping your expenses as low as possible and applying as much of the savings to your retirement as possible, the stress of not having enough will disappear.