Saving for retirement can be simple, but simple doesn't mean easy. Saving 15 percent of your income is common advice, but almost no one actually saves this much. Even if you can't save 15 percent of your paychecks right now, here are five easy ways to adjust your spending so you can free up cash to save for retirement:
1. Switch to a prepaid cell phone. What's free yet still costs a fortune? The answer is a free smartphone that requires you to accept a 2-year contract at $80 a month. Prepaid phones aren't free, but the savings quickly adds up because of the lower monthly cost. Cell phone plans start as low as $5 a month, with data plans as low as $25 a month.
So what does this have to do with retirement? Saving $55 a month by paying $25 monthly for your cell phone instead of $80 may not seem like a lot. However, over 40 years of working that small savings adds up to $144,000 if invested at a 7 percent return.
2. Keep a car 10 years. If you must have a car, drive it for at least 10 years. You'll purchase half as many cars over your lifetime as someone who buys a new car every five years, and the savings is enormous.
In the book "Deal With Your Debt", Liz Weston ran the numbers. By driving a car five years longer than a typical car loan, you could save $250,000 over a lifetime of car purchases. And investing the savings with an 8 percent return would result in a nest egg of nearly $2.5 million. Think about that the next time you buy a car.
3. Ditch cable. With streaming services such as Netflix and Amazon Prime, expensive cable packages are no longer necessary. Networks also offer current programming for free through online streaming. If you reduce or eliminate cable you could significantly boost your retirement savings, and get to watch your favorite TV shows when it suits your schedule.
4. Use a cash back credit card. Credit cards offer free money. Whether in the form of cash back, points or travel rewards, plastic can be a simple and easy way to increase retirement savings. A 1 percent cash back card used for $2,500 a month in everyday spending generates $25 a month in rewards. Invested over 40 years at a 7 percent return, 1 percent cash back will get you more than $65,000. This savings can be increased with better cash back cards that pay 2 percent or more on certain purchases.
5. Invest with low-cost index funds. Investing costs matter. In a recent paper, Vanguard founder John Bogle found that an actively managed fund with an annual cost of 2.27 percent would provide a 33 percent lower return to the investor than an index fund with a 0.06 percent annual cost, assuming a 7 percent return. Investing in low-cost index funds significantly reduces costs while in most cases increasing long-term returns.
6. Refinance debt. The easiest way to reduce monthly expenses is to refinance debt to a lower interest rate. Refinancing a mortgage offers the most bang for your buck. Refinancing high rate credit card debt to credit cards with no interest for 12 months or longer is another way to save money. Lowering your interest rate not only saves money, but also helps you get out of debt faster. Once out of debt, you'll have more income to save for retirement.
7. Pick the best retirement accounts. The array of retirement account options is overwhelming for many people, including a 401(k), 403(b), IRA, Rollover IRA, SEP IRA, Simple IRA, Inherited IRA, Individual 401(k) and Roth accounts. Even something as "simple" as a Roth retirement account is complicated. There is a Roth 401(k), Roth 403(b), Roth IRA, Roth Conversion, Backdoor Roth and an Inherited Roth IRA, to name a few.
But saving in a retirement account doesn't have to be complicated. For most people, the first and best option is a 401(k) or 403(b) in which the employer matches some of your contributions. If you're lucky enough to have an employer match, contribute enough to take full advantage of the match. If you have more to save, consider a deductible or Roth IRA if you qualify. And if you have even more to save after contributing the maximum amount to an IRA, return to your 401(k) or 403(b) to max out your contribution.
Rob Berger is an attorney and founder of the popular personal finance and investing blog, doughroller.net. He is also the editor of the Dough Roller Weekly Newsletter, a free newsletter covering all aspects of personal finance and investing, and the Dough Roller Money Podcast.
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