Chapter 04: Best Ways to Save for Retirement

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If you’re wondering what some of the best ways to save for retirement are, you’ve come to the right place. So far in our retirement series, we’ve discussed how much money you need to retire and how much you should save from your paycheck for retirement. In Chapter 3, we went over how to make a budget for retirement, but now we’ll be talking about the best way to save money for retirement so you can meet that budget.

Saving for retirement is one of those things that everyone knows that they need to do, but many people aren’t sure how or when to start. If that sounds like you, here are three different ways that you can get started on your retirement savings. So no matter where you are on your journey towards retirement, take a look at these actionable steps to help you take one more step along that road.

Best Ways to Start a Retirement Fund

Below, we’ll be talking about some of the best ways to start a retirement fund. Even if you don’t plan to retire for another four decades, financial planning is crucial when it comes to retirement so that you can have enough money saved up to live comfortably in your golden years.

Contribute to your 401k plan, especially if your employer matches

Another great vehicle for retirement savings is the 401k plan, named after section 401(k) of the United States tax law that authorized their creation. 401k plans are sponsored and administered by employers, and they allow you to get a tax deduction for any of the income that you contribute. You can sign up for a 401k plan through your employer, generally through the HR or payroll departments. You elect how much of your pay you want to contribute each pay period, and that amount is subtracted from the amount you have to pay tax on.

There is a limit to the amount that you can contribute to your 401k account each year, which is typically indexed for inflation.

  • In 2022, you can contribute $20,500 of your income. In addition, if you’re 50 or older, you are additionally allowed to make what are called “catch-up” contributions.
  • In 2022, those 50 or older can contribute an additional $6,500 of their income.

You should be aware of the average 401(k) balance by age so that you can see where your 401(k) balance compares and if you’re on track to saving enough money.

Many employers choose to make contributions to the 401k accounts of their employees. In many cases, this is structured as a match to employee contributions.

One example of this might be an employer who offers a 100% match on the first 3% contributed to a 401k and a 50% match on the next 3% contributed. If your employer matches 401k contributions, that should be just about the first place you start investing. An employer match is the nearest thing to free money.

Open an IRA

Another great way to get started with retirement savings is by opening an Individual Retirement Account (IRA). There are two main types of IRA – a traditional IRA and a Roth IRA. The two types of IRAs are similar in that they are both vehicles to help you save for your retirement, but they have a few important differences.

  • A traditional IRA works similar to a 401k plan–you don’t pay tax on any money contributed now, but you will pay tax in retirement when you withdraw it. This is known as a tax-deferred savings account, which is an investment account where you don’t have to pay taxes on the money in the account until it’s withdrawn, which typically happens after retirement.
  • A Roth IRA works in reverse–you contribute now with after-tax money, but then you don’t have to pay tax on any of the contributions OR growth of your IRA when you withdraw it in retirement.

These are both generally considered good investment accounts to put your money into if you want to grow your earnings.

Just like with 401(k) plans, if you’re 50 or older, you may also be able to make catch-up contributions. This can allow you to contribute more than the maximum to your IRA. In 2022, workers who are eligible to make catch-up contributions could contribute an extra $1000 to their IRAs.

Invest your “found” money

Our final suggestion to get started with retirement savings is a way to provide a little bit of an extra jolt. After you set up your automatic contributions, you might find that you occasionally come across a little bit of extra money that you weren’t expecting. This could be income from:

Instead of just taking that cash and depositing it into your regular bank account, jump start your retirement savings by contributing that “found” money right into your retirement account.

If you want to start investing today, investing in a retirement account is one time-tested way to save money for the long haul. You just want to avoid investing mistakes that can cost you money, like not diversifying your investment portfolio enough or investing in more than you can afford to lose..

Tips of Saving For Retirement

So we’ve discussed the best way to start a retirement fund, and now we’ll be providing you with some helpful retirement saving tips so that you can get a jumpstart on your savings today.

Resolve to start today

An old proverb says that the best time to plant a tree is twenty years ago while the second-best time is today. While it is true that the best time to start maximizing your retirement savings is when you’re young, that’s also the time when people generally have the least amount of spare money to invest. So if your retirement account balances aren’t as robust as you’d prefer, resolve to start today to start saving a little bit more. No matter how old you are or how close you are to retirement, it’s never too late to start saving.

Creating a retirement budget is also one of the best ways to save for retirement because it will give you an idea of how much money you’ll need to cover your living expenses depending on where you retire. You can also use a retirement calculator to help figure out what your retirement budget will be.

Set up automatic contributions, and forget about them

No matter what type of account you choose to start your retirement savings, one important way to get started with retirement savings is to set up automatic contributions. When you only save money after all your other bills are paid, you often find yourself with nothing left at the end of the month. It’s a better idea to pay yourself first.

Set up automatic contributions to your retirement account and then forget you did. Most people find that they don’t even notice the money that gets transferred out automatically, because they never actually see it.

Track your savings goals

It’s crucial to continue to keep tabs on your savings goals so that you can ensure you’re on track with your finances. There are various ways you can go about tracking your savings goals, including the Mint app. The Mint app is free, easy to use, and accessible from anywhere, so you can stay on top of your savings goals no matter where you are.

It’s also important to consider the savings rate of your money, which is the amount of money you save compared to your gross income. Continue to keep track of your savings rate so you can ensure you’re putting enough of your monthly income towards your goals.

Make sure you understand what to expect from your Social Security benefits

While you will receive Social Security benefits when you retire, they should not be completely relied upon when planning for retirement. You need to make sure you understand what to expect from your Social Security benefits.

Social Security benefits will typically make up for 40% of your retirement income. So that means you need to have that remaining 60% made up in other ways.

Leave your retirement savings alone

When it comes to your retirement savings, you want to leave them alone until you absolutely need them, which should only be when you retire. For example, you should avoid withdrawing from your 401(k) early, even if you need the money to pay off debts. Early 401(k) withdrawal can cause you to face penalties from the IRS. It might work in some cases, but it’s important to weigh the pros and cons before making your decision.

Leaving your retirement savings alone also means your investments will continue to grow over time, thanks to the beauty of compound interest.

Key Takeaways: Best Ways to Save for Retirement

  • There are various ways to save for retirement, such as:
    • Contribute to your 401(k) account
    • Open an IRA
    • Invest your “found” money
  • The best way to start saving for retirement is to start today
  • One important way to get started with retirement savings is to set up automatic contributions
  • It’s crucial to continue to track your savings goals
  • Make sure you understand what to expect from your Social Security benefits
  • Leave your retirement savings alone

Find What Works for You and Stick With It

For some people, combining all three of the best ways to put money away for retirement might be the best course of action. For others, they might only be able to tackle one. The most important thing is that you start saving, so find the best way to put money away for retirement that works for you and stay committed to it. You’ll most likely be grateful you did later on in life.

Next up in our retirement series is Chapter 5 which will go over what a 401(k) is in greater detail.

This is for informational purposes only and should not be construed as legal, investment, credit repair, debt management, or tax advice. You should seek the assistance of a professional for tax and investment advice.

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