Planning for retirement may seem like something best left to the future, but is it?
No. To leave the workforce and live comfortably, you must be proactive and prepare for retirement long before it is your reality. Unfortunately, many individuals do not. According to data from the U.S. Government Accountability Office, in 2019, nearly half of American households had no retirement savings.
While you are entitled to monthly Social Security payments, these are not enough if you wish to travel, fix up your home, or spoil your grandchildren when you’re not working full time.
That said, there are steps you can take to start planning for retirement at an earlier age. Read on to learn more about how to plan for retirement and about the best retirement plans currently available.
Why should you care about retirement?
What you do now will echo into the future. Preparation is crucial in ensuring a good quality of life when you're no longer earning a consistent paycheck from work.
Many individuals can start saving money through employer-sponsored retirement plans like 401(k) plans. That is not always possible for younger people, but there are ways to save money regardless of your situation.
How can you start saving for retirement?
Life is costly, so setting aside money for the next chapter of your life is all but mandatory to ensure that you're able to take care of yourself and your needs. While you will receive Social Security payments, those may not be enough to get by.
Preparing for retirement can seem like a complex process since there's so much information out there, but it isn't nearly as daunting with the right tools. Described below are some tips to help you start saving.
Create a budget
Outlining your monthly income and your expenses is a great place to start. Next, outline your priorities or bills that need to be paid first, such as food, rent, and car payments. Be thorough and do your best to account for every dollar.
Keeping receipts is also an excellent way to stay on top of your spending. Once you have a clearer picture of your earnings and expenses and how they compare to one another, you will be able to determine how much you can save. Starting with smaller contributions is not a bad thing. Every little bit helps, and as your wealth grows, you'll be able to save more.
Practicing money-wise habits, like controlled spending, taking precautions against fraud – which can be costly if it occurs – and acquiring lower interest rates as you move up in the workforce may seem like small measures. But when it comes to retirement, these all add up.
One tool to help you do this is Point Card.
You work hard for your money, and Point works hard for you in return. Designed for those who want to use their own money while receiving exclusive benefits, including unlimited cash-back on all purchases, Point is a straightforward and transparent method for increasing your financial independence and wealth. As a cardholder, you're eligible for no interest rates, fraud protection with zero liability, car rental and phone insurance, and bonus cash-back on subscriptions, food delivery, rideshare services, and coffee shops.
Simply put, Point is an excellent instrument for intelligently navigating your present financial circumstances and preparing for your future, whatever or wherever that may be.
Contribute to your 401(k)
If you're offered a 401(k) plan through work, use it. Your contributions will be matched dollar for dollar by your employer up to a certain limit. See below for further details on 401(k) plans.
Open an IRA
If you do not have access to a 401(k) plan, an IRA is another great strategy to kick start your savings. Depending on your income level, you may be eligible for either a traditional IRA or a Roth IRA. Read on for more specifics.
Pay off student loans
Paying off student loans, or any other loans for that matter, will not only result in fewer recurring bills, but you will be able to put away more as you won't have any outstanding debt with the potential to snowball.
How much do you need to save for retirement?
In the financial world, many things are relative. There is no ideal retirement amount, though as always, more is typically better.
Multiple factors play a role in how much you're able to set aside for retirement, including your salary and, by extension, what tax break you fall into, whether you have access to a plan through work, how much debt you have, and when you're planning to officially retire.
Money tends to run out faster than we realize, and the longer you delay retirement, the more time you have to save.
Experts recommend predicting how much you will spend when you retire and what you will spend that money on. This can be anything from vacations to spoiling the grandkids, to pursuing new hobbies, or to purchasing a new home. It is also essential to prepare for emergencies and health care costs, as these two expenses can quickly drain your savings.
A general rule of thumb is that you should try and set aside at least 15 percent of your income each year for retirement. By the time you leave the workforce, your retirement savings should be equal to approximately 80 percent of your total pre-retirement earnings.
5 of the best retirement plans you can start looking at
The following are some of the best retirement accounts you can explore to kick off your journey toward retirement.
The traditional IRA
This plan is ideal because anyone currently in the workforce is eligible, whether self-employed or working for a company. Most individuals make contributions to this fund through the salary they earn. But, you can go to any bank and set up an account, and you can move multiple investments into it, including cash, stocks, and bonds.
Your savings grow tax-free until you reach 59 1/2 years, which is when you can withdraw your money without penalties.
If you're under the age of 50, you can contribute up to $6,000 per year. If you're 50 or older, you can contribute up to $7,000 annually.
This plan is very similar to the traditional IRA. The main difference is that you are still required to pay taxes on your contributions. But once you withdraw, your savings are tax-free. Additionally, there is no penalty for early withdrawal.
The contribution thresholds are the same as those of traditional IRAs.
Roth IRAs cater to those individuals who earn middle-to-low grade salaries. As of 2021, individuals who earn more than $140,000 and married couples who make $208,000 are not eligible for this plan.
As the name suggests, this plan is advantageous for married couples, particularly couples where one spouse is not working or earns a meager income. The unemployed spouse can open up either a traditional or Roth IRA and make contributions based on their total household income instead of just their personal income.
Essentially, this doubles a couple's savings.
Fixed annuities are a specific type of insurance contract used to complement your savings. What this means is that you will make contributions to the insurance provider who, in return, will pay you a fixed amount of money consistently.
This strategy all but guarantees stable payments that you can put toward your future. Furthermore, unlike traditional and IRA retirement accounts, there are no annual contribution limits, so you can put as much money as you want toward your future.
A 401(k) is quite similar to traditional IRAs and Roth IRAs, as all three plans are accessible through employers. Again, the primary benefit of a 401(k) is that your employer matches the contributions you make. Contribution limits are usually higher than those of an IRA account.
Since your contributions are deducted from your salary before your employer deducts income taxes, you may be eligible for tax benefits.
Remember that matching occurs up to a predetermined limit, and not all careers will offer this option to workers.
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