Saving for Retirement

Introduction

Research conducted by the Federal Reserve suggests that up to a quarter of Americans don’t have any retirement savings (source). Planning for the future is always beneficial when it comes to managing your money. In this guide, we’ll outline some effective ways to boost your retirement savings.

Steps to save for retirement

To help you save for your retirement, here are some steps to follow:

1. Set a savings target

Setting a savings target is an excellent way to motivate yourself to save more and ensure that you have enough money to live comfortably once you stop working. Experts recommend saving around 15% of your monthly income from the age of 25 to build up a substantial retirement fund, but requirements will vary according to your individual plans and preferences. Think about how much you want to save and consider factors, such as whether you’ll have a mortgage to pay, what assets you have and whether you have additional sources of income you can use.

Some financial experts suggest using the 4% rule. This enables you to calculate your retirement fund by dividing your target retirement annual income by 4%. For earnings of $80,000, this means a retirement fund of around $2 million.

2. Explore employer-sponsored initiatives and plans

If you are employed, it’s crucial to explore and research employer-sponsored initiatives and plans that are designed to help you save for the future. One popular option is a 401(k), which is a company-sponsored retirement account to which employees and employers contribute. There are two types known as traditional and Roth. If you have a traditional 401(k), your contributions will be pre-tax. This means that your taxable income will be lower but you will pay tax on withdrawals from the account. With a Roth 401(k), your contributions will be post-tax. This means that you can’t benefit from tax reductions but you won’t be charged tax on withdrawals.

A 401(k) plan is an alternative to a conventional pension. Employees and employers make contributions, which are invested. In most cases, employees choose to invest in index funds, stocks and bond mutual funds. It’s worth taking the time to research investment opportunities and get to grips with how they work and the level of risk they pose before you make a decision.

3. Set up a retirement account

If you don’t have access to employer-sponsored plans or you want to save on top of your employee contributions, you can set up a retirement account known as an IRA. There are limits to how much you can add to your account depending on your income and marital status. An IRA is very similar to a 401(k) but it is managed by the individual rather than their employer.

4. Increase savings when possible

For many people, it may not be realistic to save 15% or even 10% of their salary for retirement. Try to save as much as you can and increase your savings target as and when you can. You may find that you earn more as you get older, which enables you to save more, or that your expenses decrease, which frees up funds for your retirement account.

Summary

It’s never too early to start thinking about saving for your retirement. Set a savings target and research and explore retirement accounts and employer-sponsored plans.