Sun, 26th July, 2009 - Posted by Nash

10 Powerful Steps For A Financially Sound Retirement

Powerful steps for a financially sound retirement

In this post, Jonathan Leane of Debt Loans has listed out 10 powerful ways for us to be financially sound when we retire.

Everyone wants to retire early and rich. Perhaps your dream is to travel the states in an RV or maybe you want to be able to retire in the country with a porch swing, a pond, and an art studio. Whatever your retirement dream is, here are ten tips to make sure that your retirement is as comfortable as possible.

Step 1 – Save, save & save!

Remember this piece of advice: If you want to be rich, it isn’t about how much you make, it’s about how much you keep. Think of that sentence each time you have a “want” that isn’t in your budget. Keeping up with the Jones will not get you where you want to be when you retire. Propane space heaters and portable space heaters, for example, will save you money on your heating bills.

Step 2 – Budget to include savings for retirement

There really is no better system for keeping a handle on how much you have and how much you save. Make sure your income minus your expenses every month is equal to zero. Work with your spouse or partner on this together. Once you make a budget, stick to it. That means no impulse buying of seasonal placemats on a run to Target for toothpaste (nor should you purchase that new home theater system you see on sale in the store while you’re picking up diapers). Plan every cent that will be spent that month and stick to the plan. Saving just $150 a month at a 10% annual rate of return for 40 years will give you just under $900,000. That’s the same as saving five-dollars a day.

Step 3 – Cut down on the little expenses

Need help cutting down on expenses? David Bach, author of Smart Couples Finish Rich, suggests watching your “Latte Factor.” This is the amount per year that one spends on unnecessary purchases such as a Latte. Track spending for one week. Take a look at the smallest expenses – the candy bar from the vending machine, the latte, that muffin you picked up on your break from work. You can plug these figures into the Latte Factor calculator on the Finish Rich website to see how much money you could make if you avoid these little temptations every day.

Step 4 – Get out of debt as soon as you can

Nothing eats a hole in your dreams like owing money to a high interest credit card company or treading water each month just to stay afloat. Dave Ramsey, in his book Total Money Makeover, advises those working to get out of debt to avoid debt consolidation loans. Rather than consolidate loans, he advises that first debtors set aside a $1,000 emergency fund while continuing to make minimum payments on credit cards. Once you’ve established this fund, then it’s time to begin to pay off cards from the lowest to highest balance. Only take out a debt loan if you are in desperate need and you trust yourself not to dig a deeper hole.

Step 5 – Start saving your money for a rainy day.

Remember that emergency fund you started before you began to get out of debt? Build on it. Make sure you have enough liquid assets to live for 6-12 months if either yourself or your spouse became unemployed, injured, or some other emergency confronted you. This way, you will not go back into debt when faced with the unexpected.

Step 6 – Use insurance to protect your finances

There is no better way to safeguard your finances than to purchase insurance. At a bare minimum you should have health insurance, auto insurance, disability insurance (especially if you are self employed) and if you have dependents, life insurance.

Step 7 – Pay off your mortgage loan as soon as you can

The best way to do this is to refinance at a lower interest rate for a 15-year fixed mortgage. In addition, once you knock out your debt, you can make double payments on your home loan. By paying off your mortgage sooner, you can save yourself thousands upon thousands of dollars of interest – and put that money towards your retirement.

Step 8 – Max out your retirement savings plan

If your company offers a 401(K) plan, take advantage of it. This plan allows you to save for your retirement by depositing savings and deferring income taxes. Often, your company will match the amount you set aside in your 401(K) plan. Let this money grow. If your company does not offer a 401(K) plan, or if you are self-employed, open an IRA account and put money away in there. There are two types of IRA accounts – Traditional IRAs and Roth IRAs. A Traditional IRA offers various tax advantages for putting money away for your retirement. Some contributions may be tax deductable and often your contributions will not be taxed until they are distributed. A Roth IRA has similar rules but if you qualify, your contributions will be tax-free. The sooner you start saving, the more compound interest you will receive over the time of the account.

Step 9 – Prioritize your money for your future and retirement

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When you get a raise, instead of purchasing a bigger house or more stuff, sock the additional amount away in savings. Imagine your raise is an additional $400 a month. If you are out of debt and invest this amount plus your latte factor of $150 a month consistently with a 10% annual return, after 30 years you would have 1.2 million dollars and after 40 years you would have3.2 million dollars. Do you still want that big screen TV or that new car?

Step 10 – Seek out a financial advisor to optimize your financial plans for retirement

A good financial advisor can help you plan for future goals and retirement. Make sure you know what your goals are between now and retirement (Do you have children to send to college? Do you want to go back to school yourself?) and be sure you are honest with the advisor about your current situation.

By following these ten tips, you can be well on your way to enjoying your retirement dreams – no matter what those dreams involve.

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Categories : Personal finance, Retirement

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