3 Steps to a Golden Retirement

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Most people hope to retire financially free, but few are likely to have saved enough money before retirement to reach that goal. That's because the average American sets aside just 5.4% of his or her disposable income, or about half as much as Americans were saving in the 1970s.

That's a bit scary, given that more people are relying on their own savings to fund retirement today than in the past, when corporate pensions did a lot of the heavy lifting. But instead of panicking, consider taking these three steps that may help you build a bigger retirement nest egg.

1. Ditching debt
Few things pose a greater risk to financial freedom during retirement than debt. The average American owes thousands of dollars in student loans, auto loans, credit cards, and mortgages.

Accumulating debt to pay for an education, a car to get to work, and a place to live is common when you're young, but the time to be paying off that debt isn't during your golden years.

Instead, create a game plan to pay off your debt before retirement that includes budgeting additional monthly payments toward credit cards and auto loans. Also consider refinancing your mortgage into a shorter-term loan, such as a 15-year mortgage, if possible. Converting to a shorter-term note will let you pay off your mortgage sooner and will also save you thousands in interest payments. For example, the amount of interest paid on a $250,000 mortgage over 30 years at 5% totals $186,511.57, while the interest paid on the same mortgage at the same rate over 15 years would be just $84,685.71.

2. Plan for Social Security
Social Security is an important source of retirement income for most Americans. The amount of your monthly Social Security payment will vary depending on when you sign up for it.

If you sign up for Social Security at age 62, your monthly payment will be smaller than if you sign up at age 70, but waiting until you're 70 may not be the best choice for everyone.

People who work in physically challenging occupations or who have health concerns may prefer to take the smaller monthly payments sooner so they can leave the workforce as soon as possible and still support themselves with the help of Social Security. Those who have plenty of retirement income without Social Security may want to delay benefits so that when they eventually apply, they can enjoy larger monthly benefits for the rest of their lives.

Regardless, knowing what you're likely to collect from Social Security during retirement can help you make better decisions today. To help you get started, Social Security offers a handy online retirement benefit estimate calculator you can use to find out what your expected payment may be when you retire.

3. Invest consistently, unemotionally, and wisely
Investors who start saving for retirement earlier have a better chance of reaching their retirement income goals, but starting early isn't the only important decision you can make.

First off, you would do well to practice dollar-cost averaging, which is a simple strategy that involves choosing a specific dollar amount to invest at defined intervals, such as monthly. By using this technique, you turn investing in a habit, you avoid the hazards of trying to time the market, and you lessen your risk, because you will automatically purchase more shares when prices are low and fewer shares when prices are high. Most mutual funds and brokerages offer programs that allow for effortless automatic investments. While dollar-cost averaging doesn't guarantee that you'll make money in the markets, it can eliminate a lot of the stress associated with building your retirement nest egg.

Buying lower-cost mutual funds or ETFs is another retirement-friendly strategy. Inexpensive investments can save you money and thus let more of your savings compound over time. For example, the average actively managed mutual fund will charge you an annual investment fee of about 1.25% of your holding, but the SPDR S&P 500 ETF  will charge you just 0.11%, or 1.14% less than the average actively managed fund. That kind of savings could mean thousands of additional dollars in retirement. For example, compounding an extra 1.14% on a $100,000 investment would increase your portfolio value by $12,000 after 10 years..

Achieving a golden retirement can seem daunting, especially now that few employers offer pension plans. That means you need to be proactive when it comes to investing money for your future. There are other important financial choices you can make to help you reach your retirement goals, but reducing your debt, understanding your Social Security benefits, and making smart investment choices are great first steps.

One more strategy is to take advantage of this little-known tax "loophole"
Recent tax increases have affected nearly every American taxpayer. But with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new special report "The IRS Is Daring You to Make This Investment Now!," you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

The article 3 Steps to a Golden Retirement originally appeared on Fool.com.

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