When it comes to retirement, it’s never too early to start thinking about how you can build up savings for further down the road. In order to successfully build your retirement savings, you’ll want to think about your budget, what kind of retirement goals you have, and what your retirement plans might be. Depending on what your cash flow looks like, what field you work in, and how you budget, there are many different ways you can save for retirement. With this guide, we want to help you better understand the various ways you can save for retirement, as well as the importance of budgeting.
We’ll cover some of your options, the importance of budgeting and saving, and a few avenues toward building a nest egg for retirement as you start saving and begin planning for retirement.
Think About Your Retirement Needs
One of the first things you might consider when deciding how to save for retirement is how you plan to life when you’re retired. What kind of financial decisions will you be making? Will you be tightening your belt, living on very little, and existing on a small budget? In that case, you may not need to save as much as if you plan to see the world, try out expensive foods, and live luxuriously in retirement. You may also foresee medical expenses and simply want to save up enough to cover any additional costs that come with age and declining health. However you plan to spend your retirement, it’s important to think of your ideal lifestyle in terms of cost as you make savings and investment decisions.
Think About How Much You’ll Need To Save For Those Needs
Many people decided to use their annual salary or earnings to calculate their potential retirement needs. Depending on what you earn in a year and how much you’ve been spending each year to live, your retirement goal might be anywhere from eight or nine times your annual salary to twelve or thirteen times your annual salary. If you plan to spend more in retirement, you’ll likely want to save more than ten times your annual earnings.
Many experts recommend that you save anywhere from 10% to 15% of your earnings each year and put it toward your retirement savings. That is if you start early. If you’re closer to retirement age, but haven’t, until now, thought about or started saving for retirement, you may be making catch-up contributions each year. In this case, you might be particularly interested in finding ways to maximize your contributions.
Where To Keep Savings: Types of Accounts
One of the potentially confusing things about saving for retirement is the sheer number of options you have. At the age of 62, you may be able to start claiming social security benefits. You also may want to put your retirement savings aside in a retirement account designed specifically for retirement savings.
Why? Retirement accounts are designed to help workers put money away for retirement, so many of them come with their own unique tax benefits, or they might come with employer contributions. They also each have their own contribution limits. What account types are best for you? We’ll discuss a few different types of retirement accounts and what types of savers they might work best for.
401(k)
401(k) accounts are a traditional and common type of retirement account for employees and a popular workplace retirement plan. A 401(k) retirement account is only available through an employer. For contractors, small business owners, and entrepreneurs, who may have only been an employee for a short period during their career, a 401(k) may not be the ideal option. However, if you have no plans to leave your employer, your employer offers contributions, and you want to make the most of your retirement savings, a 401(k) plan can be an excellent option.
Some employers may even offer to match employee contributions–meaning that when you put money into your 401(k), so does your employer. It may only be a percentage of what you contribute, but any contribution from your employer is a good thing. Another potential downside to 401(k)s is that you’ll have limited investment options using your 401(k). Generally, you’ll only be able to use your retirement account to invest in a range of securities that your employer has picked out for you.
IRAs
An IRA or Individual Retirement Account is a retirement account that contractors often use to save for retirement. With individual retirement accounts, independent contractors or employees who move from company to company frequently can save for retirement independently.
Traditional IRA
Traditional IRAs have a few benefits for workers who aren’t employees – but employees can use IRAs as well! With an IRA, you get a few tax benefits – with limits: depending on how much you earn, contributions to your IRA may be tax deductible. If you gain equity in your IRA, it usually isn’t taxed until you get ready to pull your money back out. For independent contractors and employees who aren’t eligible for a 401(k), IRAs offer a way to save for retirement independently with certain tax benefits. Traditional IRAs are generally tax-deferred, meaning that you don’t pay taxes on your savings until you get ready to pull them out.
Roth IRA
A Roth IRA has a lot in common with a traditional IRA–both of them are individual retirement arrangements, and both of them are suitable for contractors and those saving independently of their employer. But there are some key differences as well: with a Roth IRA, you pay taxes on your initial contributions. Once your contributions have been made, however, they’re generally free to grow tax-free until you’re ready to pull them out.
Many experts recommend that you consider your tax rates before and after retirement. If you’re expecting lower taxes after you retire, a traditional IRA might be your better bet, but if you’re planning that luxurious retirement where your taxes actually may be higher than your pre-retirement income taxes after you retire, a Roth IRA might be a better option for you.
Other Types of Retirement Accounts
We’ve covered some of the common types of retirement arrangements and accounts, but these are far from your only options. There is a wide range of different account types available to you, each offering its own unique benefits. Some of them may be through employers, and some are independent.
For example, your company might offer a SEP or Simplified Employee Pension. They also might offer you a Payroll Deduction IRA, wherein a set amount is taken from your pay and put toward your retirement. Whatever plans and benefits your employer offers, it’s a good idea to get to know what’s available to you and how you can use it to work toward your own retirement goals.
Tips For Saving
Even if you’ve decided exactly how much you’ll need to live on when you retire, how much you’re planning to set aside each year, what type of retirement account or arrangement you’ll be using to get there, and how much your employer will be able to kick in, it’s important to start saving and budget wisely.
Think of Earnings and Spending
No matter how much you earn, it’s always important to think about your budget in terms of what’s coming in and what’s going out. There’s an old adage that goes: “A penny saved is a penny earned,” and for retirement, it couldn’t be more true. Whether or not your earnings increase, you can increase your contributions to your retirement if you can successfully decrease your spending.
The Little Things Add Up
You might’ve noticed this phenomenon already when it comes to spending: Little things add up. If you buy a coffee every single morning and eat out for lunch every day at work, you might notice that it can quickly become a financial drain. The same goes for savings, though. If you can get into the habit of regularly making small contributions, you might be surprised how fast they add up. Just as frequent small expenses add up, so do frequent small contributions.
Discuss your Options
If you’re planning to retire with employer contributions through an employer 401(k), talk to your employer about your options. Find out what kind of contributions you can expect if a 401(k) is your only option, and don’t be afraid to ask questions. By the same token, if you’re planning for retirement with a partner who also works, discuss your options together. If you want to know more about retirement and investments, don’t be afraid to seek out a financial advisor or financial education materials. There’s almost always more to learn.
Conclusion
Retirement, for many, is a time to sit back and enjoy life. Whether you’re just starting your career or you’re well on your way to retirement and want to save more, it’s always a good time to start thinking about retirement and your options. Depending on your career, it might be your best move to save independently, and it might be your best move to invest in retirement through your employer. Whatever the case, understanding your options is the first step in building a retirement plan that’s perfect for you.
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