The Sooner You Save, The Better.
The best time to start saving for retirement is right now. Even if it’s just a little bit, the sooner you start saving for retirement, the better. There are a couple reasons for that. The first is compound interest. Compound interest is essentially the interest you earn on interest. For example, if two people put the same amount of money away each year ($5,000), earn the same return on their investments (6 percent annually) and stop saving upon retirement at the same age (67), one will end up with nearly twice as much money just by starting at 22 instead of 32.
The second reason to start early is to develop good saving habits. It may make rational, mathematical sense to start saving early, but it isn’t always easy. The more you save, the more you will want to keep saving. Savings will start to feel like second nature as you see that account balance grow. We’ve established when you should start saving (now), so let’s talk about the best way to save money for retirement.
What Is A 401(k)?
Saving early is the biggest key, and the best way to start saving is a 401(k). A 401(k) is a retirement savings and investing plan that employers offer. A 401(k) plan gives employees a tax break on money they contribute. Contributions are automatically withdrawn from employee paychecks and invested in funds of the employee’s choosing. The accounts have an annual contribution limit of $22,500 in 2023 ($30,000 for those age 50 or older). Employees contribute money to an individual account by signing up for automatic deductions from their paycheck. Depending on the type of plan you have, the tax break comes either when you contribute money or when you withdraw it in retirement.
How Do You Get A 401(k)?
In most cases, you get a 401(k) from your employer. Many employers offer to match a portion of what you save, and that’s the perk that gets most of the attention. If you work somewhere that offers to toss extra money into your account based on how much you contribute, you should start filling out the paperwork now. That is an opportunity for free money that you do not want to pass up. It’s like getting an instant raise for every contribution, one that will pay you even more over time thanks to the compound interest we mentioned before.
Benefits Of A 401(k)
A 401(k) automates saving for retirement and makes investing a bit easier. You can choose your own investments from your plan’s selection, or you can let the plan choose for you. If you want a certain percentage of stocks versus bonds or vice versa, you can request that. The plans are customizable to a certain extent and generally have automatic rebalancing, so those percentages stay in line with what you requested. It makes it easy to save up without having to be hands on. If you’re curious about what saving for retirement with a 401(k) might look like for you, you can find 401(k) calculators online to see how your savings will grow tax-free with a 401(k), and the difference incremental changes like an “employer match” will make over time.
Alternatives To Employee-Offered 401(k)
While an employee-offered 401(k) is an ideal way to start saving, it’s not the only option, or sometimes even an option at all. Some downsides to a 401(k) are the limited investment options and availability. And not all employers offer access to a 401(k) plan.
But you can still reap the same tax benefits from the other big retirement savings vehicles such as IRAs and Solo 401(k)s.
An IRA is an account that offers some attractive benefits like a broader selection of investments and generally lower fees. But it also has a few downsides compared to a 401(k) — like lower contribution limits and restrictions for high earners.
If you are self-employed with no employees, there’s also a solo 401(k), which you can set up yourself with an online broker. Even though there’s no free money involved, the contribution limits are higher. You can contribute up to $66,000 to a solo 401(k) in 2023, so it still has its benefits.
How Much Should You Save?
There is no magic number when it comes to saving, but the best advice is to save as much as you reasonably can. You shouldn’t skip meals and not pay bills just to contribute to retirement, but if you can afford to put a little extra away, do it. Some financial analysts say you should save at least 15% of your income, and that’s a good benchmark, but it’s not feasible for everyone. The most important thing is just getting started. Whether it’s $25 a paycheck or the suggested 15% of your income, try to save what you can and increase it a little year by year. The most important thing you can do to set yourself up for success in retirement is save early and often enough that it comes so naturally you don’t even have to think about it.
Additional Ways To Save
In addition to 401(k)s and IRAs, other ways to set money aside for retirement include bank savings offerings such as savings accounts, money market accounts and certificates of deposit (CDs). To explore the benefits of each, plus to learn more about saving for retirement and other personal finance solutions, visit our website today.
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