You may have just landed your first “real” job or be well established in your career. But, if you’re like most people, you probably want to retire someday. To retire comfortably, you will need to have enough in savings and investments to maintain your preferred lifestyle. The key to success is to start saving as early as you can. Because the sooner you start, the more you’ll be able to prepare for the future. Here are a few tips to help you prepare for your later years and plan to prosper well into your retirement.
1. Consider your retirement needs and make a plan
A rule of thumb is to estimate that you’ll need between 70%-90% of your preretirement income to maintain your standard of living when you stop working. Consider what you may need in the future for basic living expenses and healthcare costs plus discretionary expenses like travel, entertainment, and recreation. Then devise a plan, stick to it, and set goals for yourself. Thinking about these future expenses can help inspire you to start saving more today. Be sure to also consider Social Security payments, which the Social Security Administration claims to pay the average retiree about 40% of pre-retirement earnings.
2. Review your options for saving
How you save may vary depending on your employment situation and your plan for retirement. Here are four different retirement savings options you may want to consider.
Take advantage of your company’s retirement savings plan
If your employer offers a retirement plan such as a 401(k) plan, take advantage of it. Remember, the dollars you contribute to a 401(k) plan are tax-deferred, meaning your account balance has the potential to grow without incurring taxes every year. Try to save at least 10% of your income annually. If your employer matches your 401(k) contributions, take full advantage of it by funding any amount that is matched.
Put money into an IRA
You can put up to $5,500 for this year into an Individual Retirement Account (IRA). When you open an IRA, you have two options—a traditional IRA or, if you meet the income-eligibility requirements, a Roth IRA. With a Traditional IRA your contributions have the potential to grow tax-deferred and, if eligible, your contributions may be tax-deductible as well. With a Roth IRA, you make after-tax contributions, but the money you withdraw after retirement may be free from federal taxes. You should know that the after-tax value of your funds will depend on a variety of factors, including the returns you receive, how long you have invested, inflation, and the type of IRA you choose.
Check your Pensions and Profit Sharing Plans
If your employer offers a plan, check to see what your benefit is worth. Most employers will provide an individual benefit statement. Before you change jobs, find out what will happen to your pension or profit sharing plan. Also, learn what benefits you may have from previous employment, and find out if you will be entitled to benefits from your spouse’s plan.
Consider a retirement CD
A CD, or certificate of deposit at a bank or credit union, is a good way to build your retirement savings and avoid risk as it is an insured financial product similar to a savings account. But unlike a savings account, a CD has a specific, fixed term (which is why they are sometimes called “time accounts”), and generally earns interest at a fixed interest rate. While interest rates are typically low, these accounts are FDIC-insured and never lose value, so the savings will be there when you need it in retirement.
3. Start saving sooner than later
Starting a separate retirement savings fund early allows you to accumulate more savings over a gradual period of time. Also, you’ll be able to take better advantage of compound returns the sooner you start to save. Even if you’re still in school and only working part-time, try to start with just $50 a month. Over time you can increase the amount you save, but you can’t make up for lost years of compound returns.
4. Don’t touch your savings
If you withdraw money from your retirement plan before you are 59, you will have to pay taxes and, possibly, a 10% federal tax penalty. Also, if you borrow money against your 401(k), the loan will come due immediately if you leave your job, subjecting you to potential taxes and penalties. While it can be tempting to use your retirement savings like you would emergency savings, it’s important to weigh the costs and the potential penalties before acting.
How you save can be as important as how much you save. Inflation and the type of investments you make play important roles in how much you’ll have saved at retirement. So it’s important to know how your pension or retirement savings plan is invested. If you have more questions, be sure to talk to your employer and meet with a financial advisor at Wells Fargo Advisors. Getting practical advice may help you to act now and prepare for your retirement.
Visit our retirement plan center and gain more helpful insight and guidance about investing for your retirement here. The Prepare to Prosper financial series will soon return. We’ll discuss more tips and strategies to help achieve your goals and build your personal wealth.
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