Saving for retirement should be a priority as soon as you start your career. Putting off your saving to take a grand tour of Europe might be appealing, but you could end up working well past 65 if you make these kinds of financial decisions. If you would rather not rely on the support of your children or social security when you can’t work anymore, here are some of the best ways to save for retirement.
For most people, a 401k is the first place they start investing. A 401k is a retirement savings account that allows you to deposit untaxed income from your paycheck. However, there are limits to the total amount that can be deposited annually. In 2018 the annual limit for contributions rose from $18,000 to $18,500. This includes any salary deferrals, as well as after-tax contributions to designated Roth accounts. If you’re lucky, your company will offer to match your 401k when you retire.
IRA stands for individual retirement account; unlike a 401k, the contribution to your IRA are taxed before they go into the account. However, when you decide to pull the money out of your account, only the earnings will be taxed, not the principal investment. A smart retirement strategy is to use a combination of a low fee IRA and a 401k savings account. The maximum contribution you can make to an IRA account under the age of 50 is $5,500. As a young person just starting out, maxing out your IRA account and putting the rest of your savings into a 401k is the best way to get started.
A Roth IRA provides a unique advantage that a traditional IRA does not. While a Roth IRA doesn’t offer you the same tax break as a traditional IRA, your earnings on your contributions won’t be taxed when you pull the funds out. Additionally, Roth IRAs don’t have age restrictions, but they do have income eligibility restrictions: single tax filers must have a modified adjusted gross income of less than $135,000 to contribute. Anyone with earned income who is older than 70 ½ can’t contribute to a traditional IRA.
Manage Your Debt
It’s important to manage your debt while you save for retirement. Whether it be a student loan or a car loan, your debt is accruing interest. Tackling your debt as soon as possible will give you more control over your finances in general. Make sure that you don’t forgo contributing to your retirement accounts in order to pay off your debt, however. If you focus solely on debt repayment, you could end up in an awkward position that might delay your retirement age. Develop a financial game plan that will allow you to pay off your student loans and save for retirement at the same time.
Create a Budget
It can be easy to ignore the numbers in your bank account because you know you’re always going to have enough money to go out on weekends and buy whatever you want, and it can be incredibly easy to fall into the habit of living paycheck to paycheck. Set aside some time on a weekend to map out your monthly expenses including things like gas, eating out, and entertainment. Mapping out your spending will allow you to see where you can cut back and focus on your priorities.
Life can throw some pretty unexpected curveballs your way. If you aren’t careful, one financial emergency could devastate you financially. When mapping out your budget, be sure you’re making some contributions to your savings account. Savings accounts aren’t going to produce a significant amount of interest or return on investment, but you’re going to have a much easier time accessing your funds than you will with a retirement account. If you’re using a traditional bank like Wells Fargo, they will typically only offer you .01%-.03% interest on the funds in your savings account. If you take your finances seriously, it might be time to open a separate savings account with a bank like Synchrony that offers 1.65% and no minimum APY.
Saving for retirement doesn’t have to be as complicated or challenging as it might seem—use this helpful advice to take charge of your life and your finances.