You might be thinking, “Luckily, I still have plenty of time to worry about retirement.” And you’d be right. Because “luck” is precisely what you should be taking advantage of now. When it comes to retirement, having “plenty of time” is like winning the lottery. The sooner you start saving, the more you’ll magically acquire.
For instance, if you begin saving $2,000 a year at age 25, you’ll have around $560,000 at age 65 (assuming an 8 percent annual growth rate). But if you waited until you were 35 to start saving $2,000 a year, you’d wind up with around $245,000. That’s less than half the money for only 10 fewer years!
If that’s not enough to motivate you, consider this: experts estimate you’ll need at least 70-90 percent of your preretirement income to maintain your standard of living when you stop working. Considering that the average American spends at least 20 years in retirement, that’s a whole lot of money to save. And with the future of social security uncertain and traditional pension plans gradually disapperaing, the onus has shifted to the individual.
No matter how old you are or how much you make, you need to start thinking about retirement today. If you’re just starting out or getting by on a tight budget, it might not seem like a priority. But it is. After all, if you don’t take care of your future, who will?
Here’s how to start.
Save as Much as You Can
Even if you don’t have much to spare, a little is still better than nothing. Sometimes it’s easier to have a certain amount automatically deducted from your checking account into a retirement at the start of every month. That way you won’t ever know the difference.
Know Your Options
Once you’ve determined how much to save each month, you need to decide what to do with it. Short of stashing it under your mattress, putting the money into a regular bank account is your least profitable choice. In order to make the most of your money, you should consider one of three options: the 401(k), the traditional IRA, and the Roth IRA.
401(k)
A 401(k) is a free account that’s offered only through an employer. Eligible workers can contribute a percentage of their paycheck each month before taxes are taken out. Often employers will match your contribution if it reaches a certain percentage of your salary, say 3%. Taxes aren’t paid until the money is withdrawn from the account.
Traditional IRA
If you don’t have access to a 401(k), you may want to consider a traditional IRA. Like the 401(k), the traditional IRA is tax-deferred, which means all of your dividends, interest payments and capital gains can compound each year without being hindered by taxes – allowing an IRA to grow much faster than a taxable account. You pay taxes on your money only when you make withdrawals in retirement.
Roth IRA
The Roth is different from the traditional IRA in that you pay taxes upfront at today’s tax rates. In return, you never have to pay taxes on your investment earnings. Unlike traditional IRAs, which require account holders to be under age 70½ to contribute, there are no age restrictions with a Roth IRA. Nor are account holders required to take minimum distributions starting at age 70 ½. With a Roth IRA, earnings may be withdrawn tax-free and without penalty after age 59½, provided the account has been open for at least five years.
However, there are income restrictions with a Roth IRA and you may not be eligible to contribute if your income exceeds a certain amount.
Inquire About Your Employer’s Pension Plan
Funded by the employer, a traditional pension plan promises you a specific monthly benefit at retirement. Sometimes this promised benefit is stated as an exact dollar amount, but more often, it’s calculated through a formula that includes factors such as your salary, your age, and the number of years you worked at the company. If your employer offers a pension plan, find out if you’re covered and how it works.
Know Your Retirement Needs
Social security only provides a bare minimum of protection and only about half of American workers are earning retirement benefits at work. In short, the responsibility of paying for a comfortable retirement falls squarely on you.
It’s likely your retirement income will come from numerous sources: retirement savings accounts, traditional pensions, investments, social security, etc. The future is expensive, so figure out how much you’ll need and for how long. The U.S. Department of Labor offers guides and worksheets to help you figure out your savings goals. Make a plan, stick to it. But most importantly, get started now!
