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Saving for retirement is something we often put off or think that we’re too young for or don’t have enough money to do. All of these thoughts can be detrimental to our future and also our peace of mind.
It is never too early to start saving for retirement, even if you only contribute a little right now. The following is a guide to help you get started as soon as possible, no matter where you are financially or in your career.
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Choose a Retirement Plan
You’ll have to initially think about which retirement plan is right for you. There are 401(k) accounts as well as IRA accounts, including the traditional IRA and the Roth IRA.
The following are a few things to know about choosing an actual plan:
- If your workplace offers a 410(k) or retirement plan, it’s probably best to use that. You can contribute money and then many employers will match your contributions. If your employer offers a match, contribute as much as you reasonably can. Along with 401(K)s other retirement plans your employer could offer including 403(b)s, defined benefit plans, and TSPs.
- If you don’t have a work-based retirement plan or you’ve maxed it out, you can think about an IRA. IRAs can be set up by an individual at a bank or another financial institution and an IRA can be used as a way to invest in the stock market as well as mutual funds, or bonds and you can add cash. There are IRS limitations as far as how much you can contribute to your IRA every year, and this depends on the type of IRA it is.
- If you’re self-employed you still have plenty of options including the SEP-IRA as well as the SIMPLE IRA.
The Pros and Cons of Retirement Accounts
There are benefits and also downsides with each plan option. With a 401(k), one of the primary perks was detailed above—your employee may match your contributions. It’s also good from a tax standpoint. The IRS will let you save more than three times as much in a 401(k) compared to an IRA.
If you keep the money in your plan, even if your investments earn money, you don’t owe anything.
The downside is that you have limited investment choices, and they’re usually selected by the administrator of your plan.
There can also be high fees that put a dent in your returns.
Overall if you do have access to a 401(k), take advantage. If nothing else, it can be fairly simple, and it lowers your taxable income. If you leave your job, you can rollover the money into an IRA if you choose.
With Traditional IRAs and Roth IRAs, the 2020 contribution limit is $6,000 as a combined limit for IRAs. If you’re above age 50, your limit is $7,000.
You go through an individual financial institution to set up your IRA, and you have a big selection of investments to choose from, plus you’re in control. With a Roth IRA, contributions can be withdrawn at any time, and if you’re in retirement, qualified withdrawals are tax-free.
The cons with IRAs are the low contribution limits and at higher incomes, your ability to make contributions can be phased out.
Pay Off Debt
If you are at a point in your financial life where you have debt and you aren’t yet saving for retirement, you may have to prioritize paying off that debt, at least for a period of time. However, if you feel comfortable with it, you can do both and that may be the better option depending on when you expect to be debt-free.
As you’re creating your retirement plan and account, work on creating a repayment plan for your debt at the same time.
Manage Your Finances with Technology
There are some great apps out there that can help you get on the right track financially, so take advantage.
An app like Acorns will help you keep track of your retirement and what your saving, and you’re going to be better able to meet your goals if you can see what’s going in and out in terms of spending and where you might need to make adjustments.
Finally, when it comes to retirement savings, the sooner you start, the better because that gives your money more time to grow. Compound interest occurs when your money earns interest, and then that money earns more interest. Keep this in mind if you’re putting off opening a retirement account.