Everyone knows that it’s wise to save for retirement, but with so much information out there and so many accounts looking for new customers, how do you make the right choices?
We’ve compiled some simple facts and tips about saving for retirement, so you can start off on the right track.
Let’s take a closer look …
1) You Cannot Rely on Social Security
Many of us struggle financially with an income that could be much higher, but if you think it’s tough now, it will be much tougher in older age if you haven’t saved for retirement.
This is especially true for twenty-somethings who will inherit a world where social security benefit requirements exceed contributions. In other words, whatever state income we will get, it won’t be enough to live on and forget going on cruises and having fun.
Simply put, if you’re not saving for retirement—START NOW!
2) Start Now
Saving for retirement is not something you do when you’re older, when you have a better or job, or when you’ve saved for that holiday first. If you are of working age and have a job, you need to be saving now!
Of course, that doesn’t mean you have to be saving the same amount as a salaried executive, but at the least, it should be 8% of whatever income you make.
To do this effectively you will need to start using a budget, i.e. making note of your income and expenses, and tweaking your expenses accordingly.
3) 401(k) Explained
Saving for retirement is not just about putting money into a savings account or under the mattress. The first place to start is your 401(k).
Ignore the weird coded name, a 401(k) is just a government sanctioned savings plan that permits you to save directly from your paycheck without that money being taxed. These savings and their interest can grow without being taxed until it’s withdrawn upon retirement.
You choose the percentage of your pay to save and your employer will handle the rest. Some will even match that amount, giving you free retirement money!
There is a maximum you are allowed to save ($18,500 in 2018), but most people won’t reach this limit.
4) Don’t Cash Out
401(k)s are not designed to be cashed out before the age of 59. You will be taxed on any money that you do and stung with a 10% penalty on top.
In order to protect yourself in financial emergencies, you should also up an emergency fund. If this is not possible or you’re too late, you might consider an emergency loan, if it works out better than cutting into your retirement.
5) You Don’t Have to Invest but it Helps
Many people get confused when they hear about ‘investing’ in their 401(k) because they know nothing about investing.
The truth is you don’t have to invest, i.e. you can use your 401(k) strictly as a savings account earning a modest amount of interest. Your employer and their provider will provide several options and ‘cash-only’ will be one of them.
However, to get the best return and the most possible to retire on, it’s wise to choose one of the mutual fund options. This is a relatively risk-free long-term investment. You can, of course, choose some riskier investments (company stock etc), but the point is you don’t have to do anything you don’t want to and there’s help there if you want to discuss your options.
A lot of people go with more stable investments with their retirement account and use separate accounts for riskier investments.
6) Pick a Higher than Average Savings Rate
You get what you put in for retirement. Saving just 5% will put you below the average American while saving more than 8% puts you above average. According to Fidelity Investments, the average saver who retires with more than $1 million, is saving 16% of their income.
So, you want to aim as close to 16% as your income realistically permits.
7) When to use an IRA
Your 401(k) is just one option for retirement, though it should be your first step before considering anything else because of its tax benefits. You can also use regular savings accounts if you hit your limit.
The most logical second step, however, is a Roth IRA. It offers tax benefits but in the reverse. You use your already taxed income to invest in the account, but it is tax-free when you withdraw. Most bank or investment company will offer an IRA option.
You can only save $5,500 in an IRA per year, but if you’ve reached your 401(k) limit, that’s a total of $24,000 of savings with tax benefits.
Saving for retirement might give you a headache now, but that’s more than a reasonable price to pay for comfort and freedom in later life. By following the above advice, getting started should be much less stressful.
