Today I’ll share my thoughts on why and how you should begin investing money for your retirement:
Why You Need to Save for Retirement
1. Because You Can Only Count On You
You’re the only one who can ensure you’re ready for retirement. You certainly can’t count on the Government. Are you going to ask your friends and family to support you? Are you going to be able to take out a loan?
No. You need to be prepared yourself. No one is going to save up all that money for you. And you don’t want to be relying on the charity of others to help you get by. Imagine how many trips or golfing green fees they’ll want to fund for you.
2. Because There’s Usually Free Money to be Had
There are rewards to be had for those who save for their retirement. The Government and your employer both are giving away free money in tax savings and matching contributions for those who take part. Are you getting your share?
How Much Do You Need in Retirement?
A lot of people will tell you to you need to find a specific number to shoot for in retirement. At some point this may be true, and there are some great retirement calculators to help you determine this.
But initially, you just need to get started. As with most financial issues, it’s the starting that makes the biggest difference. Knowing a number and fully understanding all the issues are secondary to just starting. But, if you just have to have a number, here’s some percentages for you.
- If you’re in your 20s, 10% of your income will likely get you to a very comfortable retirement.
- For those in their 30s, 20% contributions might be necessary if you’re just getting started.
- If you’re in your 40s or 50s and just starting to save for retirement, you’ll likely need to start saving around 50% of your income.
I’m in my mid 30s and I saved around 25% of my income towards retirement this last year.
How to Save for Retirement
Okay, let’s get down to action. Here’s how to actually start saving:
Saving for retirement has never been easier. I’m a huge fan of using tax advantaged retirement accounts. These types of accounts are really all I use to save for my own retirement. Here’s more of what I’m talking about:
1. Save with the Company Plan: The 401(k)
Do you have access to a 401(k) or 403(b) account? These accounts let you save pre-tax dollars (effectively reducing your annual taxes) towards retirement.
Some companies match a portion of your your contributions to these funds. The first thing you should be doing is contributing enough to get your employer match every month.
2. Next Step: An IRA
If you don’t have a company retirement savings account, or if you want to take your savings to the next level, you should consider an IRA. There are 2 main types: the Roth IRA and the Traditional IRA. Both have tax advantages that save you money in the long-run.
3. Go for the Maximum: Max Out Your Annual Limits
Finally, you should strive to max out your annual contribution limits every year. Doing so will allow you to achieve your retirement savings goals quicker and allow you to pay less in taxes every year. Keep in mind the IRS changes these guidelines often.
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I appreciate the intention, but this is the kind of advice that makes people throw up their hands and not act at all. Is it really realistic to ask people in their 40s and 50s to save half their earnings? No, it is not. This is the age when people have the most expensive lifestyles – teenagers, kids in college, big-house mortgages and the like. If they haven’t been saving for retirement at all, the idea that now all of a sudden they’re going to start saving half of what they earn…. Well, not realistic, like I said. Perhaps a post looking into this issue a little more closely, it is a big one, as these (we, I should say) are the people most affected by the collapse of housing prices and the famous 1990s/2000s 0% savings rate.
Hey,
I find your article really informative.
I have a pension, but not really sure of the ins and outs of it.
Just started my own blog.
still in its early stages of development.
X
When asked which comes first my kid’s college or my retirement, my financial guy says, “There are no scholarships, grants, or loans for retirement.”