According to a 2016 Gallup poll, sixty-four percent of Americans surveyed shared they are worried about not having enough money to retire. Follow along to explore ways to save for retirement, how to decode acronyms like IRA and 401(k) and become a little more informed as you plan for retirement.
If you are ready to start or improve your own retirement savings, a basic understanding of the different vehicles available can help.
1. Start saving early
Compound interest can be the first step in saving for retirement. It can help retirement savings grow as interest payments can increase those same interest-bearing assets.
If you invest $100, and earn a 10 percent interest in the first year, you'll have $110 after the first year. If you earn the same 10 percent interest in year two, you'll earn $11 (10 percent of $110) instead of $10 (10 percent of your original $100 investment). Over time, earnings can increase significantly. The earlier you start investing, the more compounding can help boost your savings over time.
Many personal finance experts suggest saving at least 10 to 15 percent of your salary every payday. If you can save more, even better.
2. Set up a retirement account
When you decide it is time to start saving, you'll need a place to put those dollars. The IRS allows several options for tax savings when you invest for retirement. These three retirement account types are among the most popular tax-advantaged savings opportunities.
IRA stands for Individual Retirement Account. A traditional IRA allows you to save for retirement with pre-tax dollars and invest your funds in a variety of investment vehicles for retirement. Pre-tax means you don't pay any taxes on those funds contributed to your traditional IRA, up to the contribution limit stated by the IRS.
You can open an IRA with a financial institution such as a brokerage firm or a bank. An IRA can be invested in a variety of securities that can expose your retirement savings to a wide array of risks. Be sure to evaluate those risks accordingly and seek the advice of an investment professional if you still have questions regarding features of the investments being considered.
A Roth IRA is another form of self-directed Individual Retirement Account, but instead of investing with pre-tax dollars like a traditional IRA, it uses after-tax dollars. So, while your annual contributions are not tax-deductible, qualified Roth IRA withdrawals in retirement are not subject to income tax nor capital gains tax.
Your anticipated future tax rate should be considered when comparing a Roth IRA to a Traditional IRA. This is because, with a Roth IRA, your contributions will be taxed at your current income tax rate as opposed to a future rate with a Traditional IRA. If you need help deciding which IRA makes the most sense for you, contact a tax professional.
A 401(k) account is an employer sponsored retirement account. Like the traditional IRA, a 401(k) uses pre-tax dollars, so you can save on taxes the year you invest and only pay taxes when you withdraw, possibly at a lower tax rate than you pay today.
Employer 401(k) accounts, or 403(b) at some nonprofits and education institutions, can be attractive because they may come with some form of employer matching. Try to take 100 percent of your employer match, as it's like free money on top of your regular salary or hourly income. When you leave an employer, you can rollover your old 401(k) into a new Rollover IRA where you control the investments, most likely with more investment options than you had in the 401(k).
3. Set up automatic contributions
One of the hardest parts of saving for retirement is remembering to contribute the funds or staying disciplined when you have short-term wants that distract you from long-term goals like retirement. To avoid the pitfalls of doing it yourself, you may be able to set up automatic retirement contributions so you can save without thinking about it.
If you participate in a 401(k) through your employer, your contributions are likely automatically deducted from your earnings. With some retirement plan providers, you can also set up periodic contribution rate increases, which is a great way to increase savings over time and avoid lifestyle inflation.
For a traditional or Roth IRA, you can also set up automatic contributions at most financial institutions. One option is to split your direct deposit so a portion of your paycheck goes directly to retirement savings. Just be sure to stay within the contribution limits for IRA's.
Annuities are a contract between an individual (or entity) and an insurance company by which the individual or entity agrees to make a single payment or series of payments to the insurance company. The insurance company then agrees to do the same in return at a future date.
Because annuities can offer guaranteed lifetime income payments, they can be a useful tool for retirement planning.
Learn more about tax-deferred growth, lifetime income and other benefits of annuities from Protective Life.
Retirement is too important to ignore
Retirement is an important step in your financial life-cycle, but it won't occur successfully on its own. Don't wait until you are pinched for time. Start saving and your dream retirement may be just around the corner.