Many Americans are woefully unprepared for retirement. While you might think that retirement isn’t something that you need to think about yet, it’s important to start thinking about retirement as soon as possible. It’s never too early to start saving for your retirement.
And if you’re middle-aged, it’s still not too late to save for retirement either. In this article, we’ll show you how to save money for retirement. So keep on reading to learn more!
1. Start Saving Now
When saving for retirement, the best thing you can do is start saving now. Don’t wait to start saving money.
Thanks to the power of compounding interest, you can make your money work for you. And the sooner you start saving, the sooner you’ll see your retirement savings start to grow.
Compound interest is when your assets are able to generate earnings. Those earnings are then reinvested so that you can generate more earnings.
How powerful is compound interest? A 25-year-old who invests $75 each month will accumulate more assets by the time they retire than a 35-year-old who saves $100 each month.
This shows that it’s usually more important to invest earlier, even if you don’t invest a lot.
2. Contribute to a Retirement Account
When looking into the best way to save money for retirement, you’ll want to know how to start a retirement fund.
A retirement fund is an account where you deposit money and don’t withdraw it until you reach a certain age. These accounts tend to come with certain tax advantages.
Let’s go over several popular retirement account funds below.
Traditional IRA
A traditional IRA (Individual Retirement Account) is a very popular option. Basically, with this account, you contribute up to a certain amount of money each year. You then invest the money within the account.
After you turn 59 ½ years old, you can withdraw your money. With a traditional IRA, you deduct your contribution from your income taxes. All of the money in your account can grow on a tax-deferred basis until its withdrawn.
So you don’t pay any taxes until you withdraw your money. This is a great option for working professionals who believe they will be in a lower income tax bracket when they retire. If that’s the case, they can contribute money and pay taxes on the gains at a lower rate.
Roth IRA
A Roth IRA is very similar to a traditional IRA. The main difference is the tax structure. With a Roth IRA, you pay taxes on the contributions, not the withdrawal.
This is a great option for people who are just starting their careers and don’t make a lot of income. Now, you can invest up to $6,000 into your account each year and pay taxes on your contributions at your current income tax rate.
If you invest correctly, you could end up with hundreds of thousands or even millions of dollars by the time you retire. And all of that money that you withdraw will be tax-free.
401(k)
Another popular option for saving for retirement is a 401(k). This is a fund that you set up through your employer. This is a fund that lets you invest automatically straight from your paycheck.
The best part about having a 401(k) is the employer match. A lot of companies will match some or all of the employee’s contribution to the 401(k). It is basically free money for your retirement account.
Similar to the IRA, a 401(k) comes in two forms. There’s a traditional 401(k) and a Roth 401(k). The main difference is the same as the differences between the two IRAs.
If your employer offers a 401(k) and a match, then you should definitely take advantage of this opportunity. It’s usually in your best interest to invest as much as your employer is willing to match.
3. Automate Your Savings
In finance, there’s a saying that you should “pay yourself first.” Going by this saying, you want to make your retirement contributions automatic each month. This way, you can grow your savings without having to think about it.
You can probably find a private equity firm that will let you automatically adjust your portfolio as you age. That means you might automatically invest in riskier investments when you’re younger and then transition to more stable investments as you get older.
4. Consider Delaying Social Security
This is a big way to boost your nest egg that most people don’t think about. Before you reach seventy years old, you can increase the amount of Social Security you receive by delaying when you get your Social Security payment.
The earliest you can start getting Social Security benefits is age 62. But for each year that you wait (until you turn seventy), your monthly benefit will go up.
5. Save Extra Funds
If you end up with extra money in your bank account, don’t just spend it right away. If you can, you should save a percentage of that money for your retirement.
Thanks to compound interest, even stashing away a little bit of money can go a long way.
Save for Retirement Today
As we can see, it’s pretty easy to save for retirement. What’s most important is having the discipline to actually put money away that you currently have so that you can use it in the future. By taking advantage of compound interest and tax advantaged accounts, you can effectively save for retirement and be ready for whatever life throws at you.
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