Find Out More About Retirement

7/9/2024

Retirement can feel so far off when you’re young, causing so many to neglect to save for it early enough. By starting to save sooner, you’ll have more time to watch your retirement fund grow over the years.  You may not be earning a great deal of money as you begin your career, but you have more time on your side than wealthier older folks. By making the most of this time, saving for retirement becomes a much more pleasant prospect. Even a small amount saved early can make a huge difference in your future.

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Why should you save for retirement early?

It seems one of the hardest things to do at a young age is to scrape together your hard-earned cash and put it away for something that will happen in 40 or 45 years. While this may be a hard thing for you to do, the single most important factor in growing your money for retirement, is time.  On average, your retirement investments will double every ten years. So, the earlier you start saving, the less you will need to save to meet your retirement goals. This is all due to the magic of compound interest, which is the interest you earn on your principal sum plus previously accumulated interest. Compound interest can have a dramatic effect on the value of your investments over time.

How to save for retirement

One of the most important things you can do is to just start saving. If your employer offers a retirement savings plan, such as a 401(k) or 403(b) take advantage of it. If you’re lucky, your company will offer to match a percentage of your contributions to your retirement savings. If your employer offers a 401(k) match be sure to take advantage of it because it is essentially free money.

If you’re not working for an employer with a retirement plan, then you’ll have to DIY your retirement fund by setting up a traditional IRA or Roth IRA. You can contribute or deposit up to $7,000 in 2024. As a benefit, you also get a tax deduction for contributions to a traditional IRA.  This tax deduction does not apply to a Roth IRA. The money in your traditional IRA grows tax-free until you withdraw the funds in your retirement.

Alternatively, you could invest in a Roth IRA. You open a Roth IRA using after-tax income, so you don’t get the tax deduction on your contributions; however, when you’re a retiree and withdraw the money, you’ll owe no taxes on it. In addition, you can borrow against the value of your contributions, but not the earnings, if you need to before you retire.

Social Security vs. Retirement

Social Security and your retirement investment accounts are two different things. Social security is a social insurance program which is a contract between generations. It’s a pay-as-you-go program, meaning the people who are working today are currently financing social security for their retired parents and grandparents. You can qualify for social security as early as 62 and as late as age 70. Anyone born after 1960 will be able to start collecting the full benefits of social security at age 67. To qualify for social security, you need to have worked under the social security system for 40 quarters (10 years). As of 2024, you’ll need to earn $1,730 a quarter in qualifying work for the quarter to count towards social security. The maximum number of quarters you can receive per year is four quarters, which would be $6,920 in 2024.

Read More: Will I be able to Collect Social Security? 

By completing 10 years of work, under the social security system, you’ll be able to collect Social Security once you reach the appropriate age. Social Security is calculated on your best 35 years of work, and those years don’t have to be consecutive. These years are your best working years under the social security system. The more you put into the system, the higher the amount you’ll receive when it’s your time to collect.

You need an emergency fund

Having an emergency fund will help protect your retirement savings. One of the challenges with a 401(k) plan is companies make it possible for you to access that money if you must.  Many people make the mistake of not having any other savings but their retirement fund. So, when a financial emergency happens, they are tempted to take a loan against their retirement savings, or just pull the money directly out of it in what is known as a hardship withdrawal to pay for that emergency. If you change employers, you can either roll your retirement savings over to your new job’s 401(k) or roll it over into an IRA, preserving the tax benefits.

Having an emergency fund makes it much less likely that you’ll need to raid your retirement piggy bank. Work towards having six months’ worth of living expenses stowed away in your emergency fund. You don’t have to get there all at once. Aim for one months’ worth of living expenses and go from there. Use a safe saving account to make sure your money is there when you need it.

Read More: Why Everyone Needs an Emergency Fund and How to Start

Determining the right mix of assets for retirement

Not only do you need a dedicated retirement account, but you’ll also need the right mix of assets for a financially successful retirement. Your overarching goal should be to a hold a mix of stock, bond, and cash investments that can generate growth, provide income, and preserve your capital. Your asset mix should align with your situation, how much time you have until you need the money, and how much risk you can afford to take. 

If you’re not planning to retire for decades, you have plenty of time to ride out any temporary downturns in your account balance. So, you can afford to take one more risk in the hopes of getting higher returns. If you’re getting close to retirement, however, you won’t have as much time to wait for the market to bounce back if it hits a rough patch. In this case, you might be better off in asset mix with lower risk. However, be careful not to be too conservative. Your account needs enough to last you through several decades of retirement.

Read More: Getting Started With Stock Market Investing

Some people can easily ignore the day-to-day changes in account balances that sometimes come with more aggressive investments. Instead, they focus on the overall progress toward their goal. Others lie awake at night worrying about what the investments will do tomorrow. It won’t do you any good to constantly worry about your investment decisions. So, choose a level of risk you know you can live with and avoid the temptation to change your investment strategy too frequently.

Is it ever too late to start saving?

If you haven’t started saving for retirement yet don’t panic; it’s never too late to start saving. However, the later you start saving, the bigger your sacrifice will be. Meaning the later you start saving, the more you’re going to have to reduce your consumption today to save enough for tomorrow. You’ll have to save closer to 15-20% of your earnings rather than that 5-10% you could have saved if you had started at an earlier age. The other option would be to have a reduced lifestyle in retirement or work longer than you may have if you started saving at a young age.

You’ll need to review your retirement plan and adjust it once a year. You want to reinforce the power of automatic deposits and let your funds accumulate. Once you are near retirement age, you’ll need to start paying more attention to your retirement fund to ensure you are able to reach your financial goals. When you’re in your 50’s, you’ll have a lot more understanding of what you would like your lifestyle to be, and how much money you’ll need to make your dream retirement a reality. Remember, investing in retirement isn’t just about setting aside money for later, it’s also about creating the life you will be able to enjoy once you retire.

 

 

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