If you spend enough time on the Internet researching retirement you’ll probably come across someone promising to make you rich. Often the pitch includes a painless plan or an investment that’s sure to pay off.
Too good to be true? Probably. Retiring rich is just as difficult as becoming rich pre-retirement — so be weary of anyone who makes it sound easy.
That said, there are some things you can do that’ll have a big payoff. The three tips below may not get you a private jet, but they will make your retirement much more comfortable.
#1. Harness Compound Interest
What is compound interest? It’s the investing term for earning interest on your interest. It may sound unsexy, but it’s tremendously powerful.
Here’s how it works: suppose you start with $10,000 in savings earning 10% interest. One year later you’ll have $11,000 — but now you’re earning interest on all of that, not just the original amount. The next year you’ve got $12,500. That’s nice but still not amazing, right? Give it time. If you let compound interest work long enough it starts to snowball. After 25 years that $10,000 has become $108,000 and after 50 years it’s a whopping $1,174,000. That’s without adding a single additional cent of savings.
This is why financial advisors stress starting to save early for retirement. Putting away even small amounts can lead to a massive nest egg down the road.
#2. Take Advantage of Tax Breaks and Make the Most of Matching
The slow death of the pension has led to huge uncertainty for many people planning for retirement. If you can’t count on a regular income beyond Social Security, what should you do?
There’s no easy answer, but one essential strategy is to make the most of retirement savings accounts. Things like 401(k)s and IRAs were created to give you an extra savings boost. Sometimes lost among all the complexity is one simple fact: these accounts usually have big tax advantages. And, of course, less taxes paid means more money to spend in retirement.
Also, if you’re lucky enough to work for a place that has a 401(k) match make it a priority to contribute at least enough to earn the maximum match. Why? Because a 401(k) match is essentially a salary raise. If you don’t take advantage you’re leaving money on the table.
#3. Retire Later
Yes, this one is a bit of a no-brainer. Of course you’ll be richer in retirement if you don’t retire.
Still, people often don’t understand the many payoffs of putting off retirement by even a few years. This is especially true if you didn’t start saving early. That extra time can have a number of big advantages.
First, it results in income coming in rather than going out. This means your nest egg can sit there untouched, accruing interest and maybe even growing through additional contributions. Play around with this tool from Smart Money to visualize exactly how much money that may mean.
Also, putting off retirement may mean larger Social Security checks later on. Check out this page from the Social Security Administration to see the impact of retiring at different ages.
Photo by tao_zhyn via Flickr.