Setting up a retirement plan can be intimidating, time consuming and even overwhelming. However, there are a variety or resources available to help you every step of the way. Ultimately, the final choice for how to save and manage the money you set aside for retirement will be completely up to you, but it is always nice to have a little guidance as you take the first shaky steps into the world of retirement planning.
To get you started on your journey, we’ll give you some tips on which retirement accounts are available, how you should go about investing your savings, how to budget for retirement and more!
Creating a Retirement Account
There are many retirement account options that can help you with your retirement planning. One of the most popular accounts people open when preparing for retirement is a 401(k). A 401 (k) is an employer sponsored retirement account where the money you put into it each paycheck is non-taxable.
This means that if you put aside $3,000 of your yearly $50,000 salary into your account, only $47,000 of your yearly salary will be taxed. You can also invest this non-taxable income into mutual funds or exchange-traded funds, but that’s more a conversation for the next section.
Employers also often offer matching programs, so they can match your contributions to your 401(k) account up to a certain amount. You can access your 401(k) fund starting at age 60, but you can withdraw from your account at an earlier age if you pay a 10 percent fee. It is recommended to avoid doing this unless absolutely necessary, as this money is meant to help you during your retirement. If you start chipping away at your retirement funds before you even retire, it might not be as helpful in the future.
The next type of retirement account is an IRA. IRAs come in two basic types: traditional IRAs and Roth IRAs. Traditional IRAs allow you to set money aside every paycheck, but it will be taxed unlike in a 401(k). However, you can list the amount you set aside in your IRA account as a tax deductible, but be aware that the money is not deductible if your total income is too high. The money in your traditional IRA account will be taxed when you withdraw it from your account at a later date.
In a Roth IRA account, the earnings you set aside will be taxed and cannot be claimed as a tax deductible, so it will not be taxed later on when you withdraw it from your account if you are at least 59 and a half years of age or older. If you try to withdraw your retirement funds before then, the money will be taxed.
Another important thing to keep in mind are the limitations of each retirement account. A 401(k) allows users to contribute approximately $19,000 a year, and $6,000 more if you are older than 50 years of age. On the other hand, an IRA account only lets you contribute $6,000 a year, with only a $1,000 increase if you are older than 50 years of age.
We know the prospect of investing can be scary, but finding the best way to invest for retirement is a necessary step for all individuals to take when preparing for retirement. The money you save for retirement will actually decrease in value over time due to inflation, so it is important to also find a way to keep your funds growing over time to counteract that. Investing, even in small amounts, can help your money increase in value over time and eventually give you a larger return during retirement.
One of the most popular ways to invest while preparing for retirement is to put money towards a mutual fund. Mutual funds are open-ended investment programs funded by shareholders. Mutual fund investments are usually available through 401(k) programs, and are often recommended as a popular investment route.
Mutual funds and similar programs can help you grow the money you invest by 3 to 5 percent each year. This may not seem like a lot, but it can be a significant amount over time.
For example, if you invest just $50 a month, you will have invested about $18,000 in 30 years. That might not seem like a significant amount, but if the money you invested increased by 5 percent every year, you could have accumulated almost $40,000 in your investment account. Now, that’s a good chunk of change.
Of course, investing can get much more complicated than that when you start investing in the stock market. If you intend to diversify your investments, which is always recommended, it is always advised to talk to an investment expert before you decide to invest a significant amount of money. You need to learn when to invest, when to pull out of an investment if stocks are not looking good and so on.
Just be sure to do your research and invest in something, because it really will be more bang for your buck in your retirement plan.
Figuring out a monthly budget that will help you meet your retirement fund goals can be tricky. It is often said that you should be able to survive off of 4 percent of your savings is the indicator that you are ready to retire. However, this is not true for everyone, as we all have our own needs and circumstances to account for and 4 percent simply isn’t a feasible number.
The amount you will need to save to retire is entirely dependent on your current age, the age you wish to retire, your current income, your standard of living and the standard of living you are aiming to obtain in retirement.
We know it can be tricky to figure all this out, which is why we recommend using a retirement calculator to get an idea of what you should be saving and how you should be working your monthly budget around that.
After establishing how much money you need to set aside each month to meet your retirement goals, you can start building your monthly budget to meet those goals. It helps to calculate your monthly income and subtract your monthly expenses from it to see how close or how far you are from meeting your monthly goals according to the amount you calculated on a retirement estimator.
If you are far off the mark, you will need to consider restricting your monthly spending, such as cutting back on the amount of times you eat out a week or how much shopping you do. Whatever your largest unnecessary expense is, reduce it as much as possible or cut it out of your budget all together if you can. It can be difficult, but the aim is to meet your retirement goals so you can live easier in the future. A little sacrifice in the present will be well worth it.
You will encounter expenses during retirement that you may not encounter in your everyday life now. One of the largest expenses retirees encounter are medical expenses. Aging can come with a lot more medical issues than the ones you faced in your youth. One doctors check up a year will no longer cut it and you may need to set aside a significant amount of money in case of any unexpected medical expenses.
Another thing to consider is paying down your debt fully before you retire. Debt can really suck the life out of any budget or retirement plan, be it student loan debt, credit card debt or something else. Paying down your debt before you retire will free up so much money for you in the future and allow you to really focus on saving for your retirement.
A helpful way to do this is paying more than the minimum due for your debt payments every month and consulting a debt expert in cases where extreme debt management is necessary.
Finally, do not wait until retirement is right around the corner before you start saving. For retirement planning, the earlier you start saving, the better off you will be. We all love to procrastinate, but this is one instance where you should try your best not to.
It’s simple math. If you start saving and putting money aside for retirement when you’re 25, you will have far more to work with than if you started saving when you were 35. You don’t have to sacrifice the fun things in life to save for the future, but it’s good to start thinking about it and saving even just a little each month to start building up a solid retirement fund.