We all hear how important it is to save for retirement. It’s something we learn from a very young age. However, many of us either don't save enough or start saving too late in life. Some people don’t understand how to go about putting their retirement nest egg together. Even if you did start saving into your 30s and 40s, it's important to understand the differences within the process to build a successful and comfortable retirement.
How to save for retirement
There are many types of retirement savings accounts. Most people look into IRAs and 401(k)s. They were created specifically to give people incentives to save for retirement.
Unlike regular investment accounts, IRAs and 401(k)s offer tax breaks on your squirreled funds. The tax breaks can be either upfront or as you withdraw funds down the line.
What are some benefits of employer plans?
Many companies offer employer-sponsored retirement plans that match any amount of money you contribute to your 401(k). Be sure to direct your first savings dollars into that account until you receive the full match to ensure a better yield down the line.
There are a number of reasons why employer plans make saving easier. Since money is taken directly out of your paycheck, you won’t really miss it. The fact that many employers often match your contributions also works in your favor.
Contributing to an IRA as part of retirement savings
There are several types of IRA accounts — Roth IRAs and traditional IRAs. Regardless of which IRA you choose, you can contribute up to $6,000 each year. If you max out your IRA contributions and want to save more, you can still contribute to your 401(k) or other employer plans over the years.
The differences between a traditional IRA and a Roth IRA are as follows:
- Contributions to traditional IRAs are tax-deductible. Your money grows tax-free and withdrawals are taxed as current income after age 59 and a half.
- Roth IRA contributions aren't deductible. Withdrawals are tax-free if the owner has had the IRA account for at least five years. The withdrawals are also tax-free as long as you defer withdrawing until age 59 and a half.
- Contributions to traditional IRAs are tax-deductible, but 401(k)s are a different story. These plans are tax-deferred, which means that as long as the money remains in the plan, you will owe nothing on it as it grows.
What are some downsides to 401(k)s and IRAs?
Investments available through a 401(k) are chosen by the plan administrator. As a result, the investments are limited by the terms of that plan. Also, 401(k)s and IRAs may include some hidden investment expenses, specifically administrative fees, annuity fees, and brokerage account inactivity fees.
Catching up on retirement savings at 50
Starting to save for retirement early is always the best way to go. However, not all hope is lost if you start saving late. After you reach age 50, you will be eligible to go beyond the normal limits by using 'catch-up contributions.' They work with IRAs and 401(k)s.
How much do I need to save for retirement?
Although it may sound impossible to calculate exactly how much money you’re going to need in your 70s, it's possible if you put in the work. You will have to do some budgeting and make some projections about where you might be at that age. Taking the time now to calculate your needs in retirement will be beneficial in the long run. Setting benchmarks along the way can also help you refinance in the coming years to keep your retirement savings on track.