When you’re young and just starting out in a career, it’s normal to think of retirement as something that you can deal with in the future. It’s not imminent and you’ve got plenty of time – right?
Maybe not. The truth is that retirement’s out of reach for a lot of people – and the people who have the best chance of being able to retire are the ones who started saving early.
At Addition Financial, our younger members sometimes want to know:
“When should you start saving for retirement?”
That’s a good question. Here are some of the best retirement strategies – and some pointers on when and how to get started.
When to Start Saving for Retirement
The short answer to “When should I start saving for retirement?” is “As soon as possible.” The sooner you start saving and planning, the more money you’ll have when the time comes.
Most of us don’t have the wherewithal or inclination to save for retirement when we’re still in school. When you’re on a tight student budget or searching for a job after graduation, you’re probably focused on making ends meet. You’re spending the money you earn.
However, once you’ve got a steady job and enough money to meet your expenses, you can and should start saving for retirement. You don’t need to save a huge amount each month but anything you save will help.
Starting young gives your money time to grow. If you save and invest $25,000 before you’re 35, you’ll have far more money than you would if you saved and invested $75,000 at an older age. That fact illustrates the importance of saving from an early age.
Retirement Strategies to Try
We’ve determined that it’s a must to start saving for your retirement as soon as possible. But how? You might know a little about how to save money for retirement, but here are some proven strategies to consider.
Employer-Sponsored Retirement Savings Plans
There’s a good chance your employer offers a 401k or another type of retirement savings plan. Contributing to it as soon as you’re eligible is one of the best ways to accumulate savings for your retirement.
46.5% of all Americans between the ages of 25 and 34 have access to an employer-sponsored retirement savings plan. That number goes up to over 51% over the age of 35.
Let’s talk about how much to contribute. As of 2019, the maximum contribution to a 401k is $18,500 per year. It’s $12,000 per year for a simple 401k. For IRAs, the maximum is $6,000.
You should plan on contributing as much as you can afford. If you earn enough to max out your contributions, your savings will accumulate quickly.
And, if your employer offers matching contributions, it’s in your best interest to contribute enough to max out the matching offer. If you don’t, you’re turning down free money.
Set Up a Roth IRA
Both traditional and Roth IRAs offer the opportunity to save for retirement, but you can make your money stretch by choosing a Roth IRA.
You’ll pay a short-term price, since the money you contribute to a Roth IRA is post-tax, meaning that you’ll pay taxes before you contribute. The upside? If you wait to withdraw money until you’ve reached the age of 59 ½ – and the account is at least five years old – you won’t have to pay any taxes on your withdrawals.
Deposit Your Tax Refund to an IRA
Many of us think of our tax refunds as found money – a little extra to spend on a vacation or a big purchase. You can do that if you want but there’s a way to use that money to kick-start your retirement savings.
When you file your taxes, you have the option of having your refund directly deposited to your account. Instead of sending it to your bank account, consider having it deposited directly to your IRA.
Provided you haven’t maxed out your contributions for the year, this is a quick way to grow your balance and put your money to work.
Take Some Risks with Your Money
When you’re young, you can afford to take some risks with your money. While you don’t want to go overboard, allocating some of your assets to stocks is a good way to grow your savings.
The rule of thumb is to subtract your age from 110 to determine what percentage of your portfolio should be in the stock market. That means if you’re 30 years old, you could put up to 80% of your assets into stock.
If you choose this method, think carefully about your risk tolerance before you max out your stocks. It’s also important to diversify your holdings – in other words, don’t buy one stock, buy several. Or, think about buying exchange-traded or index funds such as the S&P 500 instead.
It’s never too early to think about retirement strategies. The time when you should start saving for retirement is now – and the sooner you start, the more likely it is that you’ll be able to retire when you want to.
Ready to jump-start your retirement savings? Click here to learn how Addition Financial can help.
Posted on Sep 23, 2019
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