Time passes more quickly than you think. And, as the old saying goes: Time is money. If you're wondering why you should start saving for retirement early, and how you can do that, Wyndham Capital Mortgage is here to tell you why and how.
The difference of just five years
According to a recent report published by Fox Business, 25 percent of Americans don't expect to retire before the age of 70. And a TD Ameritrade survey in 2016 found that many Americans believe they will be working not only deep into their golden years, but for the rest of their lives.
If you want to retire and retire on time, it's important that you start saving early. How early? Ideally, as soon as you get your first paycheck, the report states. However, TD Ameritrade's survey found that younger Americans typically start saving for retirement at age 26. Baby boomers began saving at age 31.
Five years of savings isn't a big deal, is it? Actually, yes. As shown in the report, if you are able to save $300 a month with an average 8 percent annual return, and you begin saving at age 26, you will have amassed $1.01 million in retirement savings by age 67. However, if you started at age 31, the savings you will have accumulated by age 67 is $673,000.
How you can save more now
There are a number of ways you can begin saving, or saving more, regardless of your age. Living below your means and with a planned budget that allows for you to save money out of each paycheck is a big one. Having an employer-sponsored retirement plan at work, such as a 401(k) is another. However, as reported by CBS News, it is possible to save for retirement even if you're not a full-time employee and you don't have a 401(k). You can open up a traditional IRA through your bank or financial institution, investment firm, or life insurance company. You're allowed to contribute up to $5,500 a year to it if you're under 50, or $6,500 if you're older, and that money can be deducted from your federal tax return if neither you or your spouse has an employer-sponsored retirement plan.
You can also contribute to a Roth IRA, which is similar to a traditional IRA, except there are maximum income limits with a Roth, and you can't deduct your contributions. However, if you leave the money in the account for at least five years and you are over 59 1/2 years old, you do not have to pay tax for withdrawing money from the Roth. The report notes that this is a good plan for younger people, as they have the benefit of time.
Self employed individuals can save up to 20 percent of their net earnings through a Simplified Employee Pension (SEP), and the money is sheltered from income taxes until you choose to withdraw it. Similar options include the Solo 401(k), and the SIMPLE IRA.
The Refinance Option
Another option that you can use to save more money for retirement is to refinance your house. HSH explains that there are two ways you can accomplish this: by lowering your payments or by shortening your loan term.
If you choose to extend your loan term to, say, a 30-year fixed rate, you will see lower payments. You can take the money you saved through the lower payments to place in a retirement plan or an investment account. You could also save that money to pay off the mortgage in full at a later date, thus eliminating your mortgage debt before retirement.
If you've already saved a good bit of money for retirement, refinancing to a shorter term might make sense to you as it will allow you to enter retirement with a home that is paid off. However if you are considering this option to be sure to understand how much the savings of doing so really will be -- if it takes too long for you to cover the additional closing costs and transaction fees, then the shorter loan term doesn't make sense for you.
Whether refinancing is a good option or not depends on your circumstances. If you are good at saving money and can discipline yourself to save the money you save through reduced payments and an extended term, then that option is a good one. If you lack the discipline to save, a shorter loan term can act as a sort of forced saving plan in that it builds your home equity faster.
If time is money, then now is the time for you to consider refinancing your home.