Retirement. Is there any word in the English language that is associated with more mixed feelings? On the one hand, we love to picture ourselves lying on a hammock with a tropical drink while dabbling in helping out with our grandchildren.
On the other hand, so many of us are dangerously short when it comes to being able to afford this lifestyle, and we wonder if we might be the ones bagging groceries (not that there’s anything wrong with that!). Saving is crucial albeit challenging for many of us. Need some guidance? Read on for the best ways to save for retirement.
Start Now!
That’s a simple one. Do what you can today. There’s no better time like the present might sound horrible cliché, but it’s true when it comes to saving for retirement. As this article put out by the Bank of America puts it, “Especially if you’re just beginning to put money away for retirement, start saving and investing as much as you can now, and let compound interest—the ability of your assets to generate earnings, which are reinvested to generate their own earnings—have an opportunity to work in your favor.” Even if you start out small, start now.
Open an IRA
No, that doesn’t stand for “Investing in retirement is awesome,” although that would be appropriate. An IRA, or individual retirement account, comes in two options, the Traditional IRA and the Roth IRA.
You want be sure to make the right choice between these for your situation, as it will make a significant difference when it comes to savings. Although it’s more nuanced than this, the main difference is that the Traditional IRA contributions are tax-deductible for both federal and state tax returns for the year of the contribution.
The withdrawals from these during retirement are taxed just like ordinary income. Roth IRAs don’t provide any tax breaks at the time of the contributions, but the earnings and withdrawals on these are typically tax-free. You should do an IRA cost comparison and/or consult an advisor to find out which is best for you and what you are eligible for.
Take Advantage of the 401(k)
If you work for an employer that offers this plan—which allows you to contribute pre-tax money to it—go for it. While some might argue it isn’t the most aggressive of investments, one of the best things about it is that because the money comes out of your paycheck before taxes, your take-home pay will not feel significantly smaller. This, in turn, leaves you feeling freer to invest more.
The best way to maximize its effectiveness is to contribute the maximum you can if your employer matches your contribution. If not, you’re throwing free money away. As founder of Financial Plan, Inc. in Bellingham, WA, puts it in this Investopedia.com article, “A 401(k) match is a terrible thing to waste. We have seen employees who are not participating in their company 401(k), and as a result they are throwing away from money from the employer match.”
Maximize Savings With Catch-Up Contributions
Unlike other things in life, the investments we’ve mentioned aren’t out to get you but, in fact, are set up to help you succeed. The biggest example of this is catch-up contributions. If your contributions to your 401(k) and IRAs haven’t been as big as you would have liked, you are allowed to go beyond the normal eligibility limits once you hit the age of 50. You can view a chart on catch-up contributions or consult with an advisor. Even better, the limit on contributions raised this past year.
Sweat the Small and Big Stuff
We don’t mean that we want you to become a giant ball of stress but, when it comes to finances, you do actually want to sweat the small stuff. It adds up more than you probably realize. Everyone feels the pain of the big home and car fixes, but that daily Starbuck’s habit will cost you a lot annually.
Instead of a weekly family night at the movies, try a monthly movie night. Much like with your investments, you can start small and once you start seeing it affecting your savings account, you’ll be more inclined to shun things that don’t really matter in the long run.
Retirement doesn’t have to be a dirty word. Start preparing now and you can live the life you want in your golden years.