You may have already heard of the oldest money saving tip: "The best day to start investing was yesterday. The second-best day is today." This is especially true when it comes to retirement. No matter how far away your retirement is, the constant reminders to save for retirement can stress out anyone. With these tips, you can start preparing for retirement today.
Compound interest is often the reason many people try to start saving for retirement early. Compound interest builds on itself over time, so you're earning interest on your interest. The earlier you start putting money into an account that will earn you compounded interest, the more it pays off in the long run. Investing a decade earlier can make a difference of hundreds of thousands of dollars. Retirement accounts offer the best opportunities for tax-advantaged investing. Some people will even apply for a loan then invest that money to jumpstart their savings process.
The most common types of retirement accounts are 401(k) accounts and Individual Retirement Accounts (IRA). There are other types of accounts depending if you work at a nonprofit or if you're self-employed, but we'll focus on the two main branches of retirement accounts.
Many for-profit employers offer employees 401(k), with the exception of some smaller businesses. If you sign up for a 401(k), your employer will automatically take a certain percentage of your earnings out of your paycheck and put it in an investment account. These accounts are often holdings in a combination of bonds and stock mutual funds. An important money saving tip: if your employer will match your contribution to your 401(k) up to a certain percentage of your salary, you should try to contribute as much as you can to reach that limit. You don't have to pay income tax on the money in your 401(k) when you deposit it, but you do have to pay taxes on it once you withdraw it.
You may have heard of a traditional IRA and a Roth IRA. Both plans are arranged through a financial institution other than your employer. They're like a 401(k) because you can hold investments in several financial products: mutual funds, exchange-traded funds, stocks, and bonds. Money saving tip: you can have both an IRA and a 401(k), which might be helpful given government limits on how much you can contribute to each account. The main difference between a traditional IRA and a Roth IRA is when you pay taxes.
With a Roth IRA, you contribute "after-tax," which essentially means you pay taxes once you deposit the money, but you don't pay taxes when you withdraw it. Although keep in mind there are certain age limitations for when you can begin withdrawing the money without penalty. One potential drawback is an income limit for Roth IRAs. If you make above a certain income level every year, the amount you can contribute to the account decreases. If you make above a certain income tier, you cannot hold a Roth IRA at all.
Money that you deposit into a traditional IRA is pre-tax income, so it has a different tax timeline than a Roth IRA. The amount you contribute to a traditional IRA is tax deductible. You can deduct the amount you invest from your income taxes the year that you deposit it, up to a certain amount. How much you can deduct from your taxes depends on your income. However, you will have to pay taxes when you withdraw the money. For both traditional IRAs and Roth IRAs, you do not have to pay taxes on the growth of the money while it is in the account.
Figuring out how much to save for retirement involves many considerations, some of them difficult. You may need to assess if you will need to move into a retirement home or an assisted living facility, or if you will need to save money for unexpected medical bills. Take into account plans to travel and consider if you will be receiving inheritance in the future. These will all factor into your calculation of how much money you'll need to save to have a good quality of life once you retire.
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