A Beginner’s Guide to Saving for Retirement

A Beginner’s Guide to Saving for Retirement
  • Opening Intro -

    Whether you have years for money to grow or retirement is looming, this beginner's guide to saving for retirement should help.

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Saving a Little Is Better Than Saving Nothing

Even if your wages are barely enough to pay the bills, try to set aside some money from each paycheck. The amount many financial advisors recommend is 10% of your income per year.

But if you can’t save that much, that’s okay. Start somewhere by putting money aside in a separate, interest-bearing account reserved for your retirement savings.

Take Advantage of Employer Contributions

Contribute the required minimum percentage to your employer’s retirement plan to trigger the employer “match,” if your workplace offers it. The match is free money, and supplementing your own savings with the employer match pays off in compounding over time.

Many employer matches are generous—if you save 3%, they kick in 7% to get you up to the recommended 10% annual saving rate.

Understand your plan’s “vesting” rules—meaning when the money your employer puts in becomes all yours.

Most plans have immediate vesting of your own contributions, but matching funds may vest on a schedule based on how many years you’ve been on the job.

Options for Self-Employed Workers

There are a variety of options for self-employed gig workers and entrepreneurs, including traditional and Roth IRAs (individual retirement accounts) or solo 401(k) plans.

These plans vary by how much you can contribute per year, and in the case of self-employed IRAs (SEP-IRA) or one-participant 401(k) plans, their annual contribution limits may be more generous than IRAs or employer plans. Do your research and seek advice from a financial professional if you are confused about your options.

Consider the Effect of Time and Taxes

The maximum you can contribute annually to a “tax-advantaged” retirement account (one that grows with tax-deferred savings) goes up after age 50. Many employer plans also offer “catch-up” options to increase your savings after a certain age.

Contributions in pre-tax dollars reduce your taxable income because you put them away without paying taxes until you withdraw the funds many years later (at age 59 ½ or later, unless you want to pay a substantial penalty). A Roth IRA uses after-tax dollars that don’t reduce your taxable income, but you don’t pay taxes on withdrawals when you can make them.

Diversify and Rebalance

The most often common investment advice for beginners saving for retirement is “diversify.” This means spreading your money (and, therefore, your risk) over different types of investments.

Younger workers can handle more risk and put more money into stock funds, while older workers approaching retirement often “rebalance” to put a larger percentage of their money in income-producing investments like bonds.

other valuable tips:

Some retirement plans include an option to put money into an annuity, which is a contract with an insurance company that promises a minimum income over a set period after retirement. Annuities can lock up a lot of money for a long time, so make sure you understand your annuity options before buying or investing in one.

Image Credit: saving for retirement by envato.com

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Categories: Retirement Planning

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