A third of all Americans have not begun saving for retirement, according to a recent study highlighted in Time. Whether you're just establishing a career, starting to wind down, or somewhere in between, it's best to plan for the day when you cannot or do not want to continue working that nine-to-five.
The day you retire from work, you'll need enough money to live on, and sadly, Social Security allotments won't be enough. The amount you save now is called your retirement savings, and there are two major ways it can be built up.
401(k). Among the most common ways to save for retirement, the 401(k) is the most well-known. This one is often the easiest to start, because many employers administer your startup and offer a matching contribution as a corporate perk. So it benefits companies to mention it - even encourage it - and most people hear about it through their boss or human resources representative.
Traditional, Roth, or Simple IRA. The IRA ("Individual Retirement Account") plan is attractive to aggressive savers who know the importance of squirrelling away as much as possible. Ideally, the IRA holder has already maxed out her allowed contributions to the company-sponsored 401(k) and wants to sacrifice now to live a stress-free life later. There are different types of IRA's, and your financial advisers can help you decide which ones is best for you.
Need some motivation to get started? Here are the benefits of habitually building your nest egg.
- Reduce taxable income. Putting aside a portion for retirement each month lowers your on-paper income, so you pay less in overall income tax each year.
- Tax deferred saving. When your auto deductions go from your paycheck straight into a defined contribution plan, Uncle Sam is left out of the loop, so more of your earnings go to you - not the government.
- Peace of mind. You and your family can rest easy knowing you're doing your part to cover costs of your future lifestyle.
- Compound interest. This little nugget of information has seasoned investors waking up in a chuckle. Compound interest is when the interest on your account goes to work earning its own interest. That's right, money your cash has earned turns around and accumulates even more for you without your lifting a finger.
- No penalty for switching gigs. Your retirement savings can be carried from one employer to another. So if you'd like to move up - or over - you can do so without worrying about your investment.
- Great habits. Not only do these retirement accounts offer good ways to save, they also help you establish overall habits of saving. Learning to say "no" to at least some of your impulses will be a skill that comes in handy once you're not collecting that regular paycheck each month.
Social security income, a part-time job, and a paid off house will help in retirement, but they won't cover what you need to live comfortably, especially if, like most people, your health declines in those golden years. Plan early and reap the benefits of saving for retirement. We'll be with you every step of the way.
Image Source: Flickr