You've probably heard about the importance of saving money for retirement. Saving early and maxing out contributions can put you in a nice position when it's time to retire. But when you're in your 20s and 30s, it's easy to think of other ways to use that cash (hello house, cars, kids). These simple tips can help you get started on your savings plan and keep your retirement financially secure.
Understand Your Options When Saving Money for Retirement
Many people don't start saving money for retirement because they don't know where to get started. There are several options, all with different rules, so it's intimidating to begin. Here's what you should know.
- 401(k) and 403(b) — These are employer-sponsored plans that you typically sign up for when you begin work. You authorize a weekly or bi-weekly percentage of your paycheck to be automatically sent to a designated investment broker account. The great thing about these plans is that there's usually an employer match. They may match everything you save dollar for dollar or 3%-5% of your salary. Either way, maximize this option to get all the free money you can from your employer.
- Traditional IRAs — Allowable contributions of $6,000 in 2020 ($7,000 if 50 or older). Contributions can be deducted from your income taxes and you can begin withdrawing at 59 1/2.
- Roth IRAs — Roth IRAs are taxed on the money deposited upfront, but then can grow and be withdrawn tax-free.
Start Saving Early and Consider Stock Options
The earlier you start, the more money you'll have by the time you retire. Because of compound interest, saving in your 20s will significantly increase your retirement account than if you start in your 30s. While it's difficult when you're just starting out, putting away just a small amount from your paycheck will benefit you in the long run.
It's also important to consider your stock options within your retirement account. In your 20s, 30s, and even your 40s, you still have a long while until retirement. Investing in riskier or more aggressive stocks could be very beneficial for your bottom line. Plus, you have the time to recoup from the stock market fluctuations.
On that same note, you should periodically check-in and see how your retirement account is doing. Don't just ignore it and hope for the best. Make an appointment with a financial advisor. Become proactive with your savings and keep active with your accounts.
Redirect Your Raise, Bonus or Tax Refund
Do you get a yearly raise? How about bonuses? Any extra money you receive could easily be redirected to your retirement account. If you automatically transfer that money to your account, you won't even miss it.
The IRS also makes saving for your retirement easy. Form 8888 allows you to contribute all, or a portion of your refund, to your IRA. Talk about tax incentives.
Increase Savings Each Year
While this may seem difficult, especially if your salary doesn't increase each year, consider what you spend on high-priced coffees or eating out. Cutting back on just a few "extras" each week will surely be enough to increase your retirement contribution for the year, even if just 1%.
Remember, an increase doesn't need to be hundreds of dollars a month to be effective. Adding $30-$50 more each month to your savings could significantly increase your long-term balance.
Saving money for retirement doesn't have to be an all or nothing approach. Simple changes to your lifestyle and taking an active part in your finances can result in big changes in the long run. Don't wait any longer — begin saving money for retirement today.