How to Start Saving for Retirement

Many people know that saving for retirement is important, but not everyone knows how to get started. Figuring out how much to save, where to invest, and for how long can be overwhelming. However, the earlier you start saving for retirement, the more time your money has to compound and grow. Here is a guide on how to get started.

Calculate How Much You Need To Save

The first step in saving for retirement is determining your retirement age. The next step is calculating how much you need to save to retire at that age.

As a benchmark, finance professionals recommend saving at least 15% of pre-tax income yearly. This 15% estimate aims to save at least 55% to 80% of preretirement income for each year of your retirement. People beginning their retirement savings in their 30s or later may need to save more than 15% annually.

Another factor to consider when calculating how much you need to save is what lifestyle you’d like to live during retirement. You may want to maintain your current lifestyle, downsize to save on expenses or live on a higher budget than your present one. Whatever the case, knowing what lifestyle you want to live and at what age you’d like to retire will help you calculate how much you’ll need to save. There are online retirement calculators that can help you determine all of the abovementioned.

Choose Your Saving Vehicles

The next step in beginning retirement savings is selecting the right savings vehicles. To maximize savings, people can choose from a myriad of vehicles, such as a 401(k), IRA, or other tax-advantaged accounts.

Employer Pension Plans

While traditional pension plans aren’t as pervasive as once, some employees still have access to them. Traditional pension plans offer a guaranteed income during retirement. Check to see if you can access a pension plan at work and what benefits the plan has.

401(k)

Many employees have access to an employer-provided defined benefit plan for retirement savings like a 401(k). This can be a good vehicle to begin saving for retirement since employers often offer a match. An employer match is when employers offer to ‘match’ what you contribute to your 401k dollar-for-dollar up to a limit. For example, an employer may match 50% of your contribution up to 6% of your salary.

In practical terms, if you earn $100,000, your employer would match up to $6,000. This means if you contribute a minimum of $6,000 to your 401(k), your employer will contribute an additional $3,000 to your 401(k). Likewise, your $12,000 401 (k) contribution could net you a $6,000 contribution from your employer.

You should at least contribute enough to get the full employer match for the year. Depending on your goals, at some point you may aspire to max out the 401(k).

In addition to a 401(k), employers may also offer similar plans like a 403(b), employee stock ownership plans, or profit-sharing plans.

IRA

An individual retirement account (IRA) can be another vehicle to begin retirement savings. It’s a tax-advantaged account with annual contribution limits. People can choose from a traditional IRA or a Roth IRA. With a traditional IRA, the account is funded with pre-tax dollars, which can be deducted up to a limit depending on your income. However, taxes are paid on contributions and earnings when you withdraw the money during retirement. A Roth IRA is funded with after tax dollars and can provide tax-free withdrawals during retirement. If you can, contribute the maximum amount to an IRA.

HSA

When saving for retirement, it’s also important to consider the cost of healthcare. It can be a robust expense during retirement, so it’s important to earmark money for it. Health savings accounts (HSAs) pay for healthcare expenses and have triple tax benefits. The money put into the accounts is pre-tax, the money grows tax-free, and you enjoy tax-free withdrawals when the money is used for qualified healthcare expenses. An attractive characteristic of an HSA account is that any unused funds can stay in the HSA and be invested. Also, some employers will offer an employer match to an HSA or contribute a set amount each month.

Saving As a Self-Employed Person

Nontraditional workers who engage in entrepreneurship, freelance, or contract work can save for retirement too. For instance, they are free to contribute to traditional and Roth IRAs. Additionally, self-employed people have access to retirement accounts that are also tax advantaged. Here are a few examples:

• Solo 401(k): This is a 401(k) for self-employed people. It functions similar to a traditional 401(k)
• SEP IRA: Ideal for entrepreneurs with few or no employees. There is an annual contribution limit and contributions are tax deductible up to a limit.
• SIMPLE IRA: Often used by business owners with 100 employees or more. Contributions limits aren’t as high as a SEP IRA and Solo 401(k) but they are deductible up to a limit.

If you need help starting your retirement savings journey, someone from our team can help you get started.