10 Ways the Middle Class Can Save for Retirement and Pay for Rising Costs
Retirement comes with many expenses, including healthcare, long-term care, housing, food, transportation and entertainment — to name a few. As someone in the middle class, if your goal is to maintain a similar lifestyle once you retire, you’ll want to start saving up now.
Be Aware: Suze Orman: Why Even Big Retirement Savers Are at Risk
Try This: 5 Unusual Ways To Make Extra Money (That Actually Work)
This is especially important in the face of rising costs. The average rate of inflation over the past 10 years is 2.84%, according to the U.S. Bureau of Labor Statistics. A hundred dollar bill from 2014 has the same buying power as $131.85 today.
But this doesn’t tell the whole story. Certain things, like travel, groceries and real estate, have skyrocketed in price over the years. Unless things change drastically, chances are that the cost of everyday goods and services will continue to rise well into the future.
So, how can you, as someone in the middle class, save for retirement and handle these rising costs? Here’s what the experts say.
Start With a Household Budget
“You’ll want to maximize your retirement savings as much as possible. But the only way to know for sure how much you can afford to invest is to put together a budget,” said Todd Stearn, founder and CEO of The Money Manual.
Creating a budget will give you a much clearer picture of your finances — including your income and expenses. But you’ll need to stick to it.
“Stick to your budget and set aside time each month to reevaluate it to ensure it is an accurate reflection of your financial situation,” said Jan Heaman, senior financial planner in private wealth management at UMB Bank.
At the same time, find ways to cut back on unnecessary expenses, like recurring monthly subscriptions, eating out and other discretionary spending.
Not sure how to make a budget? Start by listing all income sources.
Then, write down everything you pay for each day, week or month. Some things, like your car payment, mortgage or insurance, will likely stay the same. Others, like utilities or food, may change. Average out the past few months’ worth of expenses to get a realistic idea of your spending.
Reevaluate your budget regularly so that you always know where your money is going and how much the costs of everyday things changes over time. Make adjustments as needed.
Learn More: I’m a Baby Boomer Who Had To Un-Retire: 3 Money Lessons I Wish I’d Known
Save Before You Spend
“American society is a spend, then save society,” said Adam D’Acierno, investment advisor at Strategic Capital. “If we can shift this perspective and build savings into our budget, then we are able to correct this issue. When we save first, then spend, the perspective about spending feels better, knowing that your future-self has already been cared for.”
You can carry this new perspective with you throughout the rest of your working years and well into retirement. As the cost of living increases over time, you can also adjust how much you spend vs. save each month.
Get Rid of Any Debts
It’s hard to save as much as you need to when debts are eating away at your funds. If you’re trying to make a shift, pay off your debts as soon as possible.
“Debt is stealing from your future, and paying off debts may make you more money than you can in the market. Plus, once your debts are paid off, you have more to save towards retirement,” said Jay Zigmont, Ph.D., CFP, founder of Childfree Wealth.
Maximize Your Retirement Account Contributions
It can be hard to set aside extra money each month for your retirement, especially when you already have other bills to pay and costs continue to rise. But it’s a smart investment in your future retirement — and in maintaining your middle class lifestyle once you leave the workforce behind.
“Once your debts are paid off, focus on maxing out your employer’s 401(k) plan or similar,” said Zigmont. “Start by putting in enough to get the match. Keep in mind that the match is not the max you can put in. In 2024, the 401(k) max employee contribution is $23,000.”
If you can’t quite contribute the full amount yet, that’s okay. Start with what you’ve got and find ways to increase your contributions as you go.
“Each time you get a raise, try to increase your 401(k) by the same amount,” Zigmont added. “You’ve been living without the raise so far, so you can continue to live without it.”
Think About Downsizing
Part of what makes someone “middle class” is, more often than not, homeownership. But owning property can be expensive.
A recent Census report found that the average sales price of new homes in 2024 was $524,800. And if that’s not pricey enough, you need to account for things like insurance, property taxes and maintenance. When all is said and done, you could be spending tens of thousands or more on a home when you could have been saving instead.
This doesn’t mean you should ditch the home altogether. Instead, think about downsizing to a smaller, more affordable property as you get older and your circumstances change. This could free up some cash that can then be used as a financial buffer against rising costs.
Save Using the Right Accounts
When it comes to saving for retirement, make sure you’re using the right account. If the average annual inflation rate is somewhere between 2% and 3%, you’ll want an account that offers a high enough yield to combat that.
“Saving in the correct accounts is crucial,” said D’Acierno. “Each type of account has its own abilities and limitations, so understanding your individual need is a crucial aspect of creating a balanced plan for saving.”
Some savings accounts offer less than 1% APY — annual percentage yield. High-yield accounts may offer over 5% APY. The higher the yield — and the more frequently the interest compounds — the faster your savings will grow.
Automate Your Savings
If you have trouble remembering to set aside money each month, automate your savings.
“Automating saving eliminates the need to remember to save,” said D’Acierno. “Automate your savings at a rate that is high, but not high enough to cause you discomfort. The easier it is to save, the more likely saving will occur!”
Your retirement goals, and your overall cost of living, are going to impact how much you need to save each month. Is 10% of your income enough? How about 25% or 50%? Factor the rising costs into your calculations to make sure you’re as prepared as you can be for retirement.
Prepare for Rising Taxes and Healthcare Costs
As a general rule, everything becomes more expensive over time. But healthcare and taxes are two of the biggest culprits, and two that you’re likely going to need to pay throughout the rest of your life — long after you retire.
“Looking at taxes, our country has debt close to $35 trillion, and this number grows daily. With this growing number and our relatively low tax environment as a country, taxes more than likely will increase in the future,” said D’Acierno.
Healthcare costs are also on the rise, but you can combat this by using a Health Savings Account (HSA).
“Accounts such as Health Savings Accounts allow for tax-deductible contributions, tax-free growth and tax-free distribution, as long as the account is used to pay for qualifying medical expenses,” said D’Acierno. “HSAs are great tools for planning for healthcare expenses, as they create a tax-free bucket of assets earmarked for healthcare instead of dipping into taxable buckets of money such as IRAs or brokerage accounts.”
Factor In Your Retirement Lifestyle
During retirement, your lifestyle is going to change. Not only will you no longer be working, but you’ll have a lot of free time to enjoy the things you want to.
But since leisurely activities, entertainment, travel and the like continue to become more expensive, it’s important to prepare sooner as opposed to later.
“People tend to underestimate how much their dreams and goals for retirement will cost, which can lead to a lot of unexpected expenses,” said Gregory Ricks, founder and CEO of Gregory Ricks & Associates. “Retirees usually spend more money in the first five to 10 years of retirement, but once their go-years are through, their expenses will begin to reduce. However, costs will begin to rise again towards the end of retirement, because that’s when more medical costs kick in.”
You might not be able to plan for everything, but it helps to have a decent idea of your future costs now so that you can cut back on spending — where it makes sense — and increase your savings.
Diversify Your Investments, Too
People in the middle class often have at least a few investments to their name. But if you haven’t diversified, you might want to do that now.
“Don’t rely solely on one investment vehicle. Use a mix of traditional 401(k)s, IRAs and Roth IRAs,” said Marty Burbank, an estate planning and elder law expert with OC Elder Law. “For instance, Roth IRAs can offer tax-free withdrawals, which can be crucial during retirement, when every dollar counts.”
As you get nearer to retirement, reassess your investments to make sure they’re growing the way you expect. If they’re growing too slowly, you might need to make some changes or reconsider your risk tolerance. If they’re right on track, check in again after another six months or a year.
More From GOBankingRates
Don't Buy a House in These 3 Cities Facing a 'Climate Change Real Estate Bubble'
This is One of the Best Ways to Boost Your Retirement Savings in 2024
This article originally appeared on GOBankingRates.com: 10 Ways the Middle Class Can Save for Retirement and Pay for Rising Costs
