If you have not yet started planning for retirement, don’t worry! The best time to start is now.
Many people delay looking into retirement, particularly if the idea is so far away in the future. However, the best time to start saving is when you’re young so you can reap the rewards later on in life.
Why you should start saving as soon as possible
According to the United States Department of Labor, only 40% of Americans have calculated how much they need to save for retirement. When the average American spends around 20 years in retirement, it’s something that you really need to plan for.
By starting your savings early, you can accumulate more savings over the years, ride out changes in the market, and also benefit from compound interest.
To afford a comfortable retirement, if you leave saving too late, you will need to save higher amounts each month to reach your target.
Different types of retirement accounts
There are numerous types of retirement and investment accounts to look into, but the two most common types you will come across are 401(k) and IRAs.
A 401(k) is a type of retirement plan offered by employers. They usually work by letting employees contribute pre-tax money. However, Roth 401(k) allows for after-tax contributions.
Individual Retirement Arrangements (IRAs)
An IRA is an account that individuals can use to save and invest for retirement. There are several types of IRAs: Traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs. Each one has slightly different eligibility and taxation rules.
Important steps to take to plan your retirement
Work out your target retirement goal
One of the first steps to take is to start from the end and work backwards. Do you know how much you will need or want in your retirement? Most people either under or overestimate.
To get a better idea of how much you’ll really need, there are plenty of free online calculators that give you an estimation. While you can never know exactly how much you’ll need, some factors to take into account include:
- Whether you’re a homeowner
- What age you want to retire
- Your current career
- The cost of living in your area
- Any health issues that could force you to take an early retirement
Online calculators usually take other things into account that will affect your final pension, including, inflation, interest, and average market returns.
You can’t plan for everything, but having a goal in mind is a great way to start preparing.
Set a target retirement age
Another part of the planning process is to set a target retirement age. This will help you work out how much you’ll need, how much you need to save, and what the likely return on investment will be by then.
By starting early, you could retire earlier than usual, but this means you’ll need a much bigger retirement pot.
Contribute to your employer’s retirement plan
If your employer offers any kind of retirement plan, make sure you sign up and contribute as much as you can. One of the benefits of this is that your taxes will be lower and in some cases, your employer may even offer to contribute more.
The great thing about employer retirement plans is that they’re automatically deducted, so you won’t ever forget to save.
Learn about different accounts and investment types
With retirement savings, education is your best friend. Spend some time researching and learning more about the different types of retirement and investment accounts so you can choose one that suits your needs.
Assess your risk tolerance
With retirement accounts, one thing you will need to decide is the level of risk you’re comfortable with.
The general advice is that younger people can afford to take higher risk investments because the rate of return is often higher and there’s enough time to recover from any dips by the time you come to retire.
As you get older, you will want to decrease the amount of risk you’re invested in. However, some people are happy enough to stick with low to medium risk accounts throughout their lives.
Planning for your retirement is such an important step to take in your life, and the sooner you get started, the better!
If you’re unsure about where to start with your retirement planning, it may help to consult a financial advisor who can give you advice on different investment accounts. In the meantime, do what you can to research and educate yourself on all the different options available to you.