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Maybe you'd love to travel the world. Maybe you'd like to focus on a favorite hobby. Or maybe you're eager to move closer to your grandchildren. No matter what your retirement goals, chances are, there's a certain way you've always imagined spending your golden years. But, according to a recent study, most U.S. pre-retirees don't have the nest eggs they need to fund the retirement lifestyles they expect.
Why the lack of savings? To start, most Americans haven't created a formal savings plan. What's more, the majority of pre-retirees haven't adequately assessed how long their savings will last after they stop working. In addition, many people have been too optimistic about their investment returns-especially in light of current economic conditions.
How can you avoid the same fate? Read on as we reveal nine ways to build your nest egg and make it last.
1. Start as soon as possible. When it comes to building your nest egg, the sooner you get started, the better. That includes creating a savings strategy, sticking to it, and monitoring your progress along the way. Remember, the earlier you start, the more time your money will have to grow. By the same token, it's never too late to begin planning, so if you haven't started yet, make it a priority.
2. Add it up. In order to create a sound retirement plan, you'll need to crunch some numbers. Once you've determined your goals, estimate how much retirement income you will need to achieve them. From there, you can calculate how much money you should save each month based on your current age, desired retirement age, and expected benefits. For more information, check out "How Much Retirement Savings Do You Need?"
3. Make savings automatic. One of the best ways to build your nest egg is to make it effortless. So instead of consciously deciding to set aside money each month, set up automatic deposits into your savings and retirement accounts. Ask your bank to establish an automatic transfer from your checking account to your savings account, and talk to your employer about setting up automatic monthly contributions.
4. Contribute to a 401(k). These days, traditional defined-benefit pensions are hard to come by, so if your employer offers one, consider yourself lucky. If not, you may be eligible for a defined-contribution retirement savings plan, such as a 401(k) plan. With a 401(k), a fund manager administers the plan, but the plan is owned and primarily funded by you, so you can determine how the funds are invested. These funds are tax-deferred, so you don't pay taxes on them until you use them. Many companies are willing to match a portion of the money that employees allocate, so be sure to check with your employer and read " The Ins and Outs of 401(k)s" for more information.
5. Build an IRA. Another retirement savings vehicle, IRAs (individual retirement accounts) also offer tax benefits. But unlike 401(k)s, these plans are not employer-sponsored. A traditional IRA is tax-deferred, so you pay taxes on your investment gains only when you make withdrawals, and in some cases, your contributions may be deductible. With a Roth IRA, you can't make deductible contributions, but you can get tax-free growth, so you won't owe any taxes when you make your withdrawals. To learn more about IRAs, visit our guide to individual retirement accouts.
6. Strike a balance. No matter which approaches you choose, it's important to diversify your investments; that way, you won't be putting your entire nest egg in one basket. The right balance will depend on your age and tolerance for risk, but generally speaking, it's best to have a mix of stocks, bonds, and traditional savings. Although stocks are usually best for long-term growth, they can be volatile; bonds are considered safer, but they generally offer lower returns, and inflation can erode their value over time. To determine the right balance for you, be sure to consult with a financial advisor.
7. Don't get penalized. All too often, people start building a nest egg for retirement, but they pay a steep price for borrowing against their plan or making early withdrawals. If you borrow from your 401(k), for example, you'll have to pay back that money with interest. With an IRA, if you withdraw money early (before the age of 59 ½), you'll be forced to pay a 10 percent fine. In all cases, try to remember that these funds are meant to be saved until retirement.
8. Delay Social Security. If you're eligible for Social Security benefits, it might seem like you should start collecting them as soon as possible. But postponing Social Security could increase the size of your monthly benefits. For example, if you start collecting benefits at age 62 (the earliest possible age), you'll receive less per check than if you start at age 67. The right strategy for you will depend on several factors, including your life expectancy and finances, so talk to your financial advisor about your options. For more information, check out our Social Security Benefits Guide.
9. Consider downsizing. When it comes to making your nest egg last, one of the smartest strategies is downsizing. For example, if you live in a large house in an expensive region, moving to a smaller home in a more affordable area could save you thousands of dollars a month between mortgage payments, utilities, taxes, insurance, and upkeep. Keep in mind that many retirement communities offer lower-cost living options, as well as bundled services, such as meals, laundry, and home maintenance.
Remember, when it comes to saving for retirement, there's no time like the present. And once you've built your nest egg, there are ways to make it last-so you can turn your retirement dreams into reality. To learn more, check out our comprehensive guides to retirement planning in your 20s, in your 30s and 40s, and in your 50s.
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