Many Americans fail to plan for retirement. Gone are the days when an employee could just show up for work for 30 years and then collect a sizable pension for the next 30 years while they sat on a beach or hit the golf links. Today, workers are more likely to have access to a defined contribution plan. These plans have only what the employee puts into them, along with any employer matching funds. They are not guaranteed payoffs that last until death. Recent polls show that 60 percent of Americans have less than $25,000 put away for retirement. Millennials are not in any better shape for the most part. Only 17 percent expect to retire with 80 percent of their working income available.
The Time to Start Saving Is Now
It does not matter if one is 25 or 55. If an individual has access to an income, he or she should start to save money toward retirement now if they have not already done so. Of course, the amount of income they have will to some extent dictate the amount of savings they are able to sock away. The reason saving today is better than saving tomorrow is related to the time value of money. A quick check of a standard retirement calculator will show that an individual who saves $5,000 per year from ages 25 to 35 and then leaves the money alone until age 65 will have a larger nest egg available at age 65 than one who started saving at 35 and saved $5,000 per year, provided they earned the same 8 percent rate of return on their investments. This example just goes to show that using the power of time to your advantage is one of the best money moves a person can make.
Ways to Save
Many Americans think they make too little to save. If they fail to save, they will have too little to live in retirement. Therefore, the cost of not saving is great. There are several ways to start a retirement account. Some are sponsored by employers. Others receive all of their funding from individuals.
One of the more common retirement savings vehicles is the 401k account. These have been around for several years, and they provide a tax-sheltered way to save for retirement. Many employers offer these accounts, and all an employee has to do to start saving is fill out an application form and then give an authorization for a specific deduction that can be a certain dollar amount each pay period or a certain percentage of pay.
The best time for employees to use a 401k for retirement investing is when their employer offers to match a certain percentage. One of the more common matches are 100 percent of the first 3 percent of the employee’s salary. Therefore, an employee who makes $2,000 a month would not have only $60 per month invested. With the employer’s match, that money would get an automatic 100 percent return to $120. Employer matches can be less than dollar-for-dollar, but it is always a good idea to invest at least up to the match.
Traditional 401k accounts also have a tax advantage. The income tax owed on this income is deferred until the money in the account is withdrawn. This can cut tax expenditures today so that the impact on current net pay is lower.
Individual Retirement Accounts, more commonly known as IRAs, are another option that can benefit those who do not have the benefit of an employer match in a 401k. The traditional IRA will cut down on an individual’s taxable income during the year he or she makes a contribution. Like the traditional 401k, the tax is due on earnings when the money is withdrawn.
Roth IRAs are a newer addition to the retirement planning stable. Contributions to a Roth IRA are not tax-deferred. They are funded with after-tax income. The benefit comes when the holder of the IRA withdraws funds from the account. Any gains are tax-free. This could conceivably lead to a very large payout in the future. Those who start investing in an IRA early can definitely benefit over the longer term more than someone who begins investing later in life.
Plan to Save
Regardless of which avenue an individual takes, it is important to set a plan. It is even more important to actually stick with the plan. Those who are able to stick with a plan for the long run will be able to build a solid nest egg by retirement.
Keep from Debt
One thing that can really derail a retirement plan is debt. Interest costs cut the available funds for retirement savings. It is much better for an individual to have their money work for them than it is for them to have to work for money to pay for the privilege of borrowing money. Those who can avoid debt will be more likely to stick with their retirement plan.
The time to save for retirement is right now. Millennials and Gen Xers alike can benefit from starting as soon as possible. Even Baby Boomers who still work should be saving toward their eventual retirement. Those who have employer-sponsored plans that offer matching funds should go that route at least to the amount of the match. Those who do not have this benefit should open up a Roth IRA and start there. They might have to give up on cable or eating out a few times a month, but their future selves will definitely thank them for their discipline as they are able to thrive in their golden years.
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