How to Save for Retirement
Knowing how to save for retirement because it can help you maintain your standard of living when you stop working. Relying on Social Security alone won’t be enough to support you for the rest of your life. By focusing on growing your retirement savings now — and for the years ahead of you — you can reach your retirement goals. Here are some of the best ways to save for retirement.
Focus on Starting Today
Thanks to compound interest, saving and investing early will help you. Your assets will generate earnings over time, and then those new assets will compound to give you even more money.
For example, a 25-year-old who starts investing $85 per month will accumulate more savings by age 65 than a 35-year-old who starts putting aside $100 per month. However, saving something is still better than reaching retirement age without the funds you need. Avoiding the impulse to spend on items that are more wants than needs can be difficult, but the instinct to save will increase as your balance grows.
Understand Your Investment Options
One of the important parts of learning how to start saving for retirement is understanding the types of accounts you can choose. The most popular options are 401(k)s and IRAs. They were created to give people additional incentives to save.
With a 401(k), you won’t have to pay taxes until you withdraw the funds in retirement. That way, you’ll have the opportunity to earn interest on money that would otherwise go to the government for your income tax. You’ll still have to pay the IRS when you use the money, but you may be in a lower tax bracket in retirement, not to mention the extra compound interest will help you retirement account grow.
A Roth 401(k)’s contributions come from post-tax money, so you won’t have to pay any taxes when you withdraw the funds. These accounts are useful for people who believe their income level and tax bracket will increase in retirement. They let you pay a lower tax now instead of waiting and paying a higher rate when you use your funds.
Many for-profit employers and some nonprofits offer 401(k)s, and you can sign up by filling out a simple form saying how much of your paycheck you’d like to put aside for retirement. Then, the company you work for will deposit that amount with the 401(k) plan provider where you’ll be able to select investments. Some businesses will even match some of your savings. Your employer might match everything you save, up to 3% of your salary or $0.50 for every dollar up to 6% of your salary, for example. If your employer doesn’t offer a 401(k) yet, put them in touch with Human Interest.
Advantages and Disadvantages of a 401(k)
Money gets removed from your paycheck automatically, so you won’t have to remember to contribute to your account every month. If your employer offers to match, you’ll get paid to save. You’ll also get to delay paying taxes on your earnings, making 401(k)s one of the most popular and tax-advantaged ways to save for retirement. However, investment choices are often limited. The plan administrator decides which stocks to offer that you can choose to invest it. With some providers, your plan administrator may not have many options. Be sure to mention to your plan administrator if you’re looking for other investment options than what you see because some 401(k) plan providers offer a much larger selection of investment options.
Annuities are insurance products that some people buy after retirement. They provide cash every year until your death, but they often have extremely high fees. If you die soon after retirement, you may only be able to use a small fraction of the money you invest, and your assets will go to an insurance company instead of your family members.
Traditional IRAs are available at most banks and brokerage firms, and they’re a popular choice for people who don’t have access to a 401(k) through their employer. If your income is below IRS thresholds, you can apply for a tax deduction for your traditional IRA contributions up to a certain amount every year. That way, your earnings can grow tax-free.
You may decide to choose a Roth IRA instead. These accounts are funded with after-tax contributions, so they don’t have income thresholds for tax deductions on withdrawals. However, your income and filing status with the IRS could impact the amount you can contribute. After you turn age 59 1/2, qualified distributions, including earnings from interest, are federal tax-free. Depending on the tax laws in your area, they may be state tax-free as well.
If you’re thinking about getting an IRA, you may want to ask financial institutions for a complete list of their fees. Choosing an account with low fees allows you to keep as much of your money as possible and earn more compound interest. Do keep in mind, though, that compared to 401(k)s, IRAs have a lower contribution limit, so your savings can’t grow as fast.
Automate Your Savings and Reduce Your Spending
Automating your retirement contributions each month gives you the opportunity to grow your nest egg without needing to think about it. Some 401(k) plan providers make it easy to max out your contributions by giving you a one-click button that will do this automatically for you (ask us for more details!). Saving for retirement is a habit that becomes easier the more you do it. Setting up automatic deductions from your paycheck can help.
You may need to examine your budget as well. You can save money and increase your ability to contribute to retirement accounts by:
- Bringing your lunch instead of eating out.
- Negotiating a lower rate on your homeowner’s insurance, your car insurance, or your mortgage.
- Limiting kids to one extracurricular activity per season and avoiding activities that require costly away games.
- Waiting for sales to make large purchases.
- Comparing prices for all items, even everyday things like groceries.
In addition to minimizing spending, you may want to keep your debt under control. According to the Federal Reserve’s Survey of Consumer Finances, the peak earning years for Americans are also the years when they carry the most debt. People under 35 owe an average of $67,400, and people from 35 to 44 years old owe $133,100 on average. Paying for personal loans, car loans, a mortgage, or credit card debt can reduce your ability to save for retirement, forcing you to pay interest instead of earning it. Talk to a financial professional about the best way to balance short- and long-term financial needs and goals.
With Human Interest, small and medium-sized businesses can offer low-cost, full-service 401(k)s to their employees. Setup is quick and easy, and our experienced account management team will help you and your workers every step of the way. Contact us for more information about investment options that can help your business attract quality applicants and retain existing employees.
Human Interest - The 401(k) provider for small and medium-sized businesses