Have you started saving for retirement? If an honest answer makes you sweat, you’re not alone: roughly 66 percent of millennials don’t feel on track when it comes to saving for retirement.
The good news is that it’s never too late to get started. We’ve broke down some basics surrounding retirement plan solutions—and what you can do right now—to get back on track.
Understand Your Time Horizon and Expected Retirement Needs
First, ask yourself the following critical question: how old am I now, and at what age do I want to retire? These questions should form the starting point for your modern retirement plan. According to Investopedia experts, “if you’re young and have 30-plus years until retirement, you should have the majority of your assets in riskier investments, such as stocks…Additionally, you need returns that outpace inflation so you can maintain purchasing power during retirement.”
Strategies will differ according to individual financial situations when determining retirement plan solutions. Remember to be realistic—many believe they won’t need 100 percent of their previous income to retire comfortably. Yet, lifestyle changes and health issues can cause unexpected expenses. Plan to budget 100 percent of your working life income for best results.
Open an Account
Next, after a comprehensive analysis of your funds and retirement goals, it’s time to open a retirement account. There are many solutions worth considering. Your final choice depends solely on one’s individual financial and employment situation. Don’t forget; modern retirement planning is all about diversifying. Therefore, you may even want to open more than one of the following accounts.
Forbes breaks down your options as follows:
This is an account available through your employer, often offering matching contributions to incentivize employees.
- Traditional 401(k): If your employer sponsors a traditional 401(k) retirement account, you’ll be able to contribute to your retirement fund with money that hasn’t been taxed. You won’t pay taxes until you withdraw the funds. This account is the most common and simplest to use.
- Roth 401(k): The primary difference between a Roth 401(k) and a traditional 401(k) is the time that you’re taxed. With a Roth account, you’ll be taxed when you deposit the money instead of when you withdraw it. According to Forbes, “if you think your income taxes are higher today, contribute to a traditional 401(k) account and benefit from lower taxes on withdrawals in retirement. If you think you’re probably in a lower tax bracket today than you will be in retirement, a Roth 401(k) account is a better choice for now.”
Small Business and Self-Employed Accounts
These retirement plan solutions are accounts specifically designed for self-employed individuals.
- Simple IRA: This account is best suited for small businesses. Employee contributions aren’t required. Any contributions made are tax-deductible.
- Solo 401(k): this account is great for self-employed business owners that don’t have any employees. They have higher contribution limits than most IRAs. In addition, all contributions are classed as business expenses, making them tax-deductible.
If you’re looking for multiple account options, there are options available for people who want to save additional money for retirement on top of their main accounts. They involve a bit more legwork (you’ll have to fill out the forms yourself) but are a great option if saving is your priority.
- Traditional IRA account: This account is available to anyone with a taxable income. All contributions are tax-deductible,. Also, your earnings will not be taxed until you withdraw from the account. This account is excellent for people who want to save on their own or combine retirement savings from a previous employer.
- Roth IRA account: This account is available to anyone with an income of less than $140,000 per year. You’ll be taxed on your contributions, but withdrawals are tax-free. You can withdraw the money before retirement without facing a hefty surcharge. According to Bankrate, it’s a great option for people in their 20s and 30s who want to put away additional funds. However, there are limits—you can only deposit $6,000 per year into the account.
Now it’s time to begin setting your money aside each month. Modern retirement planning relies on compound interest—the kind of interest that accumulates over time. It’s essential to get started as quickly as possible to maximize your potential for return—but how can you start saving now? Follow these tactics from Better Money Habits:
- Track your expenses. Cut back where possible. A spending tracker is a great tool for keeping yourself honest—NerdWallet shared their favorites for 2021.
- Budget to save 10 to 15 percent of your income.
- Set saving goals. Stick to them.
- Set a direct debit into your retirement account.
As you analyze your retirement needs, establish key goals and set up a retirement plan. You’ll be able to live with the peace of mind that your future will be taken care of. Set up those direct debits now and happy saving!