Image credit: Pixabay

When you’re in your early twenties, you can be forgiven for not thinking about your retirement. You’re new to the workforce. You’re young and you have your whole, long, life ahead of you to contribute to your retirement. You also have rent to pay. But as you’re nearing your thirties, you will start catching up to the reality that, if you started working at the age of twenty, you could have accrued almost ten-years worth of retirement savings by now.

Should you despair? Of course not! It is important to start saving for retirement early. It might be even more important, however, to do it in a smart way. No matter how early you start, if you don’t contribute enough to your retirement plans, if you make bad decisions with your money, and if you don’t take every advantage you’re offered on your way, you’ll end up saving less than you could have. So let’s see what you can do to get your retirement plan on track.

Take Stock of Your Income and Spending

The very first thing you need to do is account for your income and your expenditures. The income is easy to figure out, even if you have multiple income streams. Expenditures can be much more difficult to get a hold of, but a few statistics might point you in the right way.

According to the Bureau of Labor Statistics’ Consumer Expenditure Survey for 2015, the average consumer unit (a household with multiple members, single people, or people making joint expenditure decisions) spent more than 60% percent of their money on three things – housing, food, and transportation. At the same time, the consumer unit spent more than $2,800 on entertainment – twice the amount they spent on education. And at $349, tobacco products seemed to be three times more important than reading.

These numbers might not apply to you, but they are a good starting point for delving into your own spending habits. Calculate how much money you’re spending on the big items first, and don’t forget to factor in debt payments. While you’re at it, you might want to start looking for ways you might be losing money without even knowing it, and ways you can cut your spending.

Get (Re)Acquainted with Your Options

Unless you’re working in the public sector, you probably don’t have to think about defined benefit plans, the type of employer-sponsored pension plans that offer lifetime annuities. Defined benefit plans are being replaced by defined contribution plans, like the popular 401(k)s and IRAs, so you should start by looking into DC plans first.

A 401(k) plan and its variants allow you to put a percentage of your earnings into a separate account. There are limits to how much money you can put into your 401(k), and while employers are not required to contribute to your plan, many of them do. They do it in several ways, but contribution matching, where an employer matches a certain percentage of your payments into your account, is the most popular one. It’s also the reason why people try to maximize their 401(k) payments.

IRAs, or individual retirement accounts, are a similar type of accounts that are available to anyone, whether their business has a 401(k) plan or not. It’s a popular option for freelancers and small business owners, and it also comes with its own contribution limits and tax-deductible and non-deductable variants.

These are not the only options you have for your retirement plans. You can also contribute to Social Security. Investing in real estate is also a fairly popular option. Even being a homeowner will give you access to some tools you might find useful when you retire – there are nearly 1000 lenders in California alone who offer reverse mortgages. But the point is simple – learn as much as you can about all the options you have.

Make a Plan and Stick to It!

Do you know how much money you’ll need for your retirement? The general rule of thumb is that you can withdraw four to four and a half percent of your retirement savings a year if you don’t want to outlive them. Another piece of common wisdom states that, when you retire, you’ll only need 80% of the money you needed before retirement. So, if you live off of $50k a year now, that means that you’ll need to retire with a cool $1 million. And that’s before we adjust for inflation.

Calculating how much money you’ll need for your retirement is more complicated than these rules of thumb and common wisdom would imply. And, if you’re young now, things might change a lot by the time you get to the retirement age. The plan you create should revolve around making the most out of each advantage your get from the retirement plans you have access to. Having more than one option active is also a good idea, like paying into Social Security, your 401(k), and an IRA.

If you find you’re having trouble sticking to your plan, go back to step one and find ways to save some money. You can eat at home more, for example. If you live in a bike-friendly city, you can use your car less. And does it need to be mentioned that smoking doesn’t have a single benefit for you? Plus, eating healthy at home, riding a bike, and quitting smoking will also make you healthier. Your older self will be very grateful you made those choices when they’ll have to spend less money on healthcare.