There will come a time in all of our lives when our bodies and minds tell us that it’s time to stop working. Many of us may simply decide we no longer want to work and would rather retire to enjoy the rest of our years. The one thing that could stop some people from retiring when they want to or need to? Lack of retirement savings. But don’t worry…it’s never too late to start saving for retirement because every little bit helps! We’ll show you how to get started.
Why is saving for retirement so important?
A recent survey revealed that 56% of Americans feel that they’re not on track to retire comfortably. As retirees rely on retirement savings plans such as 401(k) and IRA plans, plus Social Security income, to fund their retirement years, it’s important for everyone in the workforce to start saving for retirement now as soon as possible.
Why?
Because retirement savings are how retirees pay their bills, buy their food, and use for a vacation or any potential emergencies. By putting money aside now for your retirement, you shouldn’t have any problem affording these things. Social Security, while helpful, may not be enough on its own to cover the essentials or any leisurely spending you might have planned.
If you want to enjoy a relaxing retirement doing the things you love to do, it’s a great time to start practicing good money habits and saving for that retirement right now!
How much money do you need to retire?
The answer to this question will be different for each individual. For those who want nothing more than to just relax at home and do not plan on having big expenses such as vacations, a new car, home remodeling, or other pricey endeavors, they won’t need to save as much as the retiree who wants to travel the world, buy a boat, or purchase a vacation home.
The average American, according to a recent Northwestern Mutual survey, stated that they’d need nearly $1.3 million saved to comfortably enjoy retirement. That is a lot of money; however, when broken down by age, it becomes a more realistic goal.
Fidelity, a leader in retirement planning, recommends that by age 30, you should have a year’s worth of salary already saved. That number increases as you get older, based on Fidelity’s progress tracking:
- Age 30: 1x your income
- Age 40: 3x your income
- Age 50: 6x your income
- Age 60: 8x your income
To put a number to these suggestions, if you earn $40,000 a year at age 40, you should have $120,000 saved by then. If, at age 60, you’re earning $60,000 a year, you should have $480,000 saved for retirement. If you’re falling short of these recommendations, you’re not alone. At age 50, the average American has less than $200,000 saved for retirement.
What’s the best way to start saving for your retirement? Regularly put some of your paycheck toward a retirement account as soon as you can.
What are the different types of retirement accounts?
There are three types of retirement accounts that most Americans use to save for their post-employment years.
Roth IRA
A Roth IRA is a very popular retirement savings option for many people–mainly because it offers major tax advantages. Once you hit age 59-½, you can start taking money out of a Roth IRA tax-free, which is a huge benefit that some other retirement plans don’t offer.
A Roth IRA also allows you to invest your retirement savings in (potentially) high-return investments like stocks and stock funds, which could lead to more earnings than a standard bank account. Like other retirement savings plans, there is a penalty if you take out your earnings before you reach 59-½ years of age–income taxes on those earnings plus a 10% bonus penalty.
You may contribute up to $6,500 for the 2023 tax filing year to your Roth IRA, and if you’re 50 or older, you can make additional catch-up contributions of $1,000 each year.
One important thing to keep in mind when it comes to Roth IRAs–there is a maximum household income limit for those who want to use a Roth IRA to save for retirement. If you file your taxes as an individual/head of household, the maximum income you can have to make a full contribution to your Roth IRA ($6,500) is $146,000. For those married, filing jointly, that income is $230,000. There is good news, however! Both the amount of contributions you can make to your IRA and the salary maximums have increased for the 2024 tax filing year! This will allow you to contribute a maximum of $7,000 to your IRA (up from $6,500), and the salary maximums have increased to $161,000 for individuals/heads of household (up from $146,000) and $240,000 for those married, filing jointly (up from $230,000).
Traditional IRA
The main difference between a Roth IRA and a traditional IRA is that any money you take out of your retirement savings after you’ve reached age 59-½ is taxed as income (remember, Roth IRAs offer tax-free withdrawals forever).
Like a Roth IRA, you may contribute up to $6,500 (for the 2023 tax filing year; this has increased to $7,000 for the 2024 tax filing year) up to age 50; at that age and older, you may contribute $8,000. And, same as a Roth IRA, you may begin withdrawing earnings from your IRA without a penalty once you turn 59-½. The penalties for early withdrawal from your IRA is similar to that of a Roth IRA–the earnings withdrawn are taxed and there may be a 10% penalty.
One major difference between a Roth IRA and a traditional IRA–unlike the Roth IRA’s income limit that does not allow you to contribute to the fund after you’ve reached a certain income level, there is no maximum traditional IRA income limit. No matter your income, you may keep contributing to your traditional IRA, up to the maximum contribution amount.
401(k)
A 401(k) retirement savings plan is arguably the best-known and most popular retirement plan because it’s widely available as a retirement fund option from most employers. A 401(k) is generally the most convenient option as well, because the investments are usually taken directly from your paycheck and automatically sent to your 401(k) account. Once you’ve decided on the percentage of income you want going toward your 401(k), you’re done!
Along with the convenience of investing in a 401(k), the biggest reason many Americans go this route when planning for retirement is the fact that many employers match–either fully or partially–their employees’ 401(k) contributions. For example, if you’ve decided to put 6% of your total salary toward your 401(k) retirement plan, a company that matches 100% of employee contributions will give you up to 6% of your total salary on top of what you’re putting in. A company that matches 50% of employee contributions will contribute 3% of your total salary if you’re contributing 6%. So, the more you invest in your 401(k) from your paycheck, the more free money you’re getting from your employer! And that can significantly increase your retirement fund.
Another reason 401(k) plans are so popular are the tax benefits associated with them. All contributions to a 401(k) are made with pre-tax dollars, which means that the money you put into your retirement account is not yet taxed. Because this is pre-taxed money, each dollar you save in your 401(k) reduces your current taxable income by that same amount. So, if you invested $5,000 in your 401(k) last year, your taxable income will be $5,000 lower when it’s time to file your taxes this year–that means you’ll likely owe less in income taxes. The tax benefits extend to not only your contributions but your employer’s as well, along with any interest and dividends your 401(k) earns–all of these amounts are tax-deferred. That means you will not owe any income tax on these funds until you withdraw from the account.
A 401(k) is available as a traditional 401(k) which is funded with pre-tax money (which we mentioned), and a Roth 401(k) which is funded with after-tax money. This means once you turn 59-½ and you want to withdraw from your 401(k), you’ll pay income taxes on the traditional 401(k) withdrawals and no taxes on a Roth 401(k) withdrawal.
One more advantage of a 401(k) is that you’re able to contribute a lot more money to your retirement fund each year than an IRA. For example, 401(k) plans allow contributions of up to $23,000, while IRAs only allow you to contribute $7,000. Once you turn 50, you can contribute another $7,500 to your 401(k) for a total of $30,500; with IRAs, your 50-and-over contributions may not exceed an extra $1,000, or $8,000 total.
401(k) retirement plans have similar penalties as IRAs for early withdrawals–pay tax on any gains plus a 10% bonus penalty.
8 Tips for Retirement Savings
Now that you know about different retirement plans and what you should be saving, here are some tips that can help you reach your retirement goals.
- Start as soon as possible
If you haven’t started saving for retirement, now’s the time. It’s not too late, but you don’t want to wait too long, because the sooner you start saving, the more money you’ll have when you retire. Contribute whatever you can afford every pay period to either an employer’s retirement savings plan or an IRA.
- Take advantage of employer 401(k) matching
We can’t recommend this enough–take full advantage of any opportunity for 401(k) employer matching. This is literally free money! Depending on your financial budget and how much money you need from your paycheck, try to invest as much as you can in your 401(k) from your paycheck each pay period.
Start small if you need to–even contributing 1% to 3% is a great place to begin, especially when your employer matches your contributions. Whatever your contribution is, your employer is basically doubling the total contribution if they offer 100% matching. So, your 1% to 3% contribution is actually 2% to 6%; if you’re able to contribute 5% or 6%, that comes out to 10% to 12% with 100% employer matching. Even if your employer only does partial matching, it’s still free money being invested in your retirement.
We understand the need to maximize every dollar in your paycheck; after all, there are bills to pay. But contributing even 1% of your paycheck to your 401(k) will make very little impact on your take-home pay–it will, however, make a major impact on your retirement savings.
When you receive a pay raise, that’s the perfect time to invest more in your 401(k). The good news is, you can adjust your contribution percentage at any time of year–so if you get a raise, consider adding another 1% or 2% (or more) to your 401(k) contributions.
- Contribute the max to your IRA
If your employer doesn’t offer a 401(k) retirement plan or doesn’t match contributions, consider an IRA and then contribute the maximum amount to it if you’re able.
- “Pay yourself first”
There is a type of budget called a “pay yourself first” budget. With this type of budget, you put portions of your paycheck into a variety of accounts before you spend it. For example, each pay period, you would add a part of your paycheck to a retirement savings account and another part to an emergency savings account before you use that money to pay your bills or save for a vacation. This ensures you’re saving wisely while still having enough money to pay for essentials.
- Catch up if you’re 50 or older
Remember when we discussed how you’re able to contribute even more to your 401(k) or IRA once you turn 50? We recommend doing so if you can afford it. With IRAs, you can add an extra $1,000 to your total contribution if you’re 50 or older; for a 401(k), those 50 and over may contribute another $7,500.
- Avoid taking Social Security benefits until you’re 67 or older
Did you know that your monthly Social Security benefits increase every year until you turn 70? You’re eligible to receive Social Security retirement payments when you turn 62; however, those payments will be less if you receive them before your “full retirement age,” which is 67 for those born after 1960. Each year you wait until you turn 70, your monthly benefit will increase. While retiring at 62 may sound very appealing to many, waiting a few extra years can make a huge difference in the amount of Social Security benefits you receive once you retire.
- Make your retirement savings automatic
If you contribute to an employer’s 401(k) account, you’re probably already doing this by having your contribution deducted from your paycheck and sent directly into the 401(k). However, if you have an IRA, we suggest you treat it in a similar way, by diverting automatic payments into the IRA from your bank account. This allows you to keep saving without having to remember to transfer money each month.
- Invest any extra money into retirement
It’s not often we get extra money; tax refunds come once a year, so do salary bonuses, if we’re lucky. Maybe you hit a nice jackpot playing the lottery or you’ve taken on a part-time job for some extra cash. While you might want to take these extra sources of income and splurge on a dream vacation or a new car, the smarter choice is to invest a significant portion of that money into your retirement funds. If you get a pay raise at work, increase your retirement contribution by even 1%. It will go a long way toward a comfortable retirement.
Final Notes
Planning for retirement can certainly be a challenge, especially when you’re focused on the present and making sure bills are paid and that you’re sticking to your budget. That’s why many Americans aren’t quite where they should be when it comes to saving for retirement. But do your best to keep one eye toward the future. You probably don’t want to continue working until you’re 75, and you probably do want to enjoy a lengthy retirement. Saving for retirement now is how you can make that a reality. If you haven’t started saving yet, why not get started now? Every little bit you can put into an IRA or a 401(k) now helps your future.
Sun Loan is here to help you achieve your financial goals. Whether it’s through a personal installment loan that can help you pay off an expense so you can keep saving for retirement or tax preparation services that can help you get the maximum refund, our friendly professionals are here for your financial wellness. Visit a local branch today or call us at (800) SUN-LOAN.
