Retirement Planning

Key points

  • Think about the lifestyle you want in retirement and how much it will cost to maintain it.
  • If your employer offers a 401(k) and will match your contributions, contribute enough to lock in the full match.
  • Self-employed people can create 401(k) options and take advantage of special IRA plans.

Saving for retirement might be one of the most extreme examples of delayed gratification. Why think about how to save for retirement when it’s so far off? While it may be tough to contemplate retirement when it’s years down the road, if you can manage to set money aside year after year, you’ll be glad you did when it’s time to retire.

Remember that when you face tough financial decisions, it’s good to have a place to turn for information. With Best Egg Financial Health, you have access to your credit score, credit history, and tools to help you reach your goals – no matter where you are on your journey.

How much do I need to save for retirement?

Your retirement savings goals will depend on several factors. It’s not necessarily about dollar amounts -it’s really about percentages. When saving for retirement, many financial advisors say to save 15% of your pre-tax income. But that advice usually applies to those who start saving early — say, at age 25 — and aim to retire at 67.

If you start your retirement fund later in life, you’ll need to put away a greater percentage to catch up. You might consider 18% if you start at age 30 or 23% if you start at age 35. Most estimates assume a retirement age of 67 because that’s when people can begin to collect their full Social Security benefits. But, if you want to retire early, you might need to save a greater percentage of your income to maintain a pre-retirement lifestyle.

Start early, start strong

Starting early on retirement savings is a great idea, but the amount you contribute monthly also makes a big difference. Let’s look at a few hypothetical retirement accounts, where each investment portfolio provides a 6% return, compounded quarterly:

  • Our first investor started depositing $75 a month into their fund at age 25. By age 67, they will have about $168,000 in that retirement account. Of that total, the investor contributed $37,800, and the rest came from compounded interest.
  • Our second investor didn’t start investing until age 35. To make up for the time lost, they put $100 a month into the same fund. By age 67 they’d have about $114,000. Of that total, the investor contributed $38,400 and the rest came from compounded interest.

Starting early makes a big difference. The first investor wound up with $54,000 more in retirement money but contributed about $600 less in total. That’s due to gaining 10 years of compound interest. Now, let’s take things one step further:

  • Our third investor, also age 25, deposited $100 a month into their retirement account. At age 67, the account was nearly $224,000. Contributing $25 more each month ($100 instead of $75) means taking $12,600 more out of pocket. However, that gains an additional $56,000 ($168,000 vs. $224,000). Quite a difference in retirement savings.

While many experts recommend putting away as much as 15% of pretax income for retirement, any amount saved is a good start. Just remember, the more you can put into your retirement fund early, the more interest you will earn over time.

Common ways of saving for retirement

Let’s explore some of the ways you can build for your retirement. There are many options out there, from savings accounts to mutual funds, index funds, and more.

  • Savings accounts are easy to start and use, but they don’t offer much in the way of interest rates or tax advantages. This is a fine way to build a savings habit and create an emergency fund. However, for long-term plans you may want to consider investment accounts that could provide better returns.
  • Traditional IRA. In a traditional Individual Retirement Account (IRA), your deposits are untaxed, and you pay income taxes on your withdrawals. This puts more in your account up-front — for “tax-deferred growth,” as it’s called — at the possible later cost of paying income taxes on distributions.
  • With Roth IRAs, your contributions are made with after-tax dollars, but the tax benefit of a Roth IRA is that distributions can be withdrawn tax free. Some retirement research is required to determine which plan is better suited for your earned income bracket and retirement goals.
  • If you can get into a workplace retirement plan, such as a 401(k), use it to your advantage. The typical employer-sponsored retirement plan often offers a match of employee contributions. You put in a percentage of your earnings — before any income tax is taken out — and your employer matches that percentage, up to a certain limit. In many cases, it’s up to the first 5% of your contributions. It’s one of the most valuable retirement benefits available. Don’t miss out on more money — max out the benefit percentage if possible.
  • Many IRA and 401(k) plans let you choose your asset allocation — the type of investments your retirement accounts are placed in. You might choose a lower-risk plan, like a bond fund, for better short-term security if you are nearing retirement age. Or you might take a chance on a higher-risk plan, like an exchange-traded fund, mutual fund, or a brokerage account where you can buy and sell stocks and other securities. Higher risk accounts usually offer higher returns, but there’s also a higher risk you might lose money, too. A mix of assets could often be the better, safer choice.
  • Self-employed investors also have good investment options. You have the choice of a tax-advantaged retirement account such as a Solo 401(k), a SEP IRA, or a Simple IRA. Each has benefits, limits, and caveats, so you’ll need to do some research to make sound financial decisions.
  • If you’re 50 or older, you’re allowed to make catch-up contributions to your IRA or 401(k). There are different limits depending on what kind of plan you have. Talk with a personal finance advisor or certified financial planner to figure out your most beneficial contributions and tax benefits.

How to save for retirement

No matter whether you save for a tax break, retirement expenses, or health care costs, there are investment accounts out there to fit your needs. And regardless of when you start — or how much you contribute — it’s wise to get into a retirement plan as soon as you can. Every day spent without a retirement plan is a day spent without dividends.

To learn more about building a secure economic future, check out Best Egg Financial Health

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October 24, 2022


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