When Should You Start Saving for Retirement?

If you’re looking for the essential easy-to-understand basics of starting to save for retirement, you’ve come to the right place. Your future self will thank you for saving for retirement, since it will substantially increase your financial security and independence in your retirement years. You’ll also build a financial resource you can tap if you have a financial emergency.

Let’s look at the answers to some common questions about saving for retirement.

Who Should Save For Retirement?

Anybody who relies on income from working should save for retirement. Most people will find that it’s inevitable that you’ll reach an age when you’re no longer able to work for income or you no longer want to work. At that time, you’ll need to piece together sources of retirement income to replace your work paycheck. You can use your retirement savings to generate a lifetime retirement paycheck that will supplement any other retirement paycheck you might receive, such as Social Security.

The only people who might not need to save for retirement are those who are independently wealthy with enough money to be sufficient to pay for their living expenses for the rest of their lives.

At What Age Should You Start Saving For Retirement?

If you haven’t already started, then the best time to start saving for retirement is now, provided you can afford set aside some money for your later years. Of course, if you’re truly spending your entire paycheck on basic living needs, you might need to wait to start saving for retirement.

The fact is, many people have competing needs for their paychecks. For example, some people are incurring expenses to establish a household or are raising families. If possible, it’s best to set something aside on a regular basis, even a small amount, to establish the savings habit. Then, when you can afford it, you can increase the amount you’re saving to help your retirement savings grow.

One more suggestion: It’s advisable to establish an emergency fund before you start saving for retirement. This will give you access to money you can spend quickly if you need it, without having to tap into your retirement savings.

What Are The Best Accounts To Set Up To Save For Retirement?

It’s best to save for retirement using an account with tax advantages, such as an IRA or a savings plan at work (see below for information about these plans). These accounts have significant tax advantages:

• Your investment earnings are sheltered from taxes while your savings are growing.
• With a traditional IRA or employer savings plan, the contributions you make are subtracted from your current taxable income.This decreases the current income taxes that you pay. You’ll be taxed on the withdrawals you make when you’re retired.
• With a Roth IRA or a Roth account that’s part of an employer savings plan, you’re taxed on the amount of the contributions you make, but then, when you withdraw any money in retirement, they’ll be free from income taxes. This increases the amount of money you can spend in retirement.

All the accounts described above have annual limits on the contribution amounts you can make. If you’re fortunate enough to have more money to save for retirement, you can always put money aside in a regular savings or investment account.

Where Are The Best Places To Save For Retirement?

The very best place to save for retirement is through a retirement savings plan at work, if you’re eligible. Examples include 401(k) plans, 403(b) plans, or 457 plans, which all refer to the section of the IRS code that describes these plans. These accounts have significant advantages:

• Your savings is on auto-pilot, as the amount you specify is automatically deducted from each paycheck.
• The plan sponsor arranges a menu of investment funds, so you don’t need to shop for investments. In this capacity, the plan sponsor acts as a fiduciary and must have your best interests at heart, i.e. they won’t take advantage of you. Often, these plans have buying power to give you a break on investment expenses, compared to what it might cost to invest on your own.
• Many plans will match your contributions, which adds even more to your savings.

If you’re eligible for such a plan, learn as much as you can about it before signing up. Your HR department should be able to provide details.

If you’re not eligible for a savings plan at work, then you can open an IRA with a reputable financial institution. Another possibility is opening a retirement savings plan for beginning savers which is offered by many states.

How Much Should You Save For Retirement?

Here are some suggestions for how much to save for retirement. To help you decide, choose the amount that best fits your circumstances:

• A simple answer is 10% to 15% of your regular income, but you might consider setting aside as much as you can afford given your current needs for income.
• If you participate in a savings plan at work, contribute the maximum amount that your employer matches. Otherwise, you’re leaving money on the table.
• If you’re in your 50s or older, prepare a retirement analysis that estimates how much annual income you’ll need at retirement to supplement any other sources of income you might have, such as Social Security or a pension. This will help you decide how much you should be saving now to meet your needs in retirement.

You might need help determining how much to save, either from a qualified retirement advisor or an online retirement savings program. Many savings plans at work host online retirement savings calculators that can help do the math for you.

How Should You Invest Your Retirement Savings?

If you’re an unsophisticated investor and just getting started, here are a few straightforward ways to start investing your savings:

• Most savings plans at work have a default savings option that’s designed for people who are just starting out. These options are often called a target date fund or lifestyle fund.
• If you’re saving at a financial institution, see if they sponsor target date or lifestyle funds. Another option to look into is a called a balanced fund, which invests in a mix of stocks and bonds.

As soon as possible, you’ll want to learn more about investment concepts, so you can tailor your investments to your situation and your feelings about stock and bond investments.

What Are Ways To Catch Up If You Started Late?

Most IRAs and employer-sponsored savings plans have “catch-up contributions” that allow you to set aside additional money if you’re age 50 or more. Of course, you can always save more money through a regular savings or investment account.

Whatever you do, don’t beat yourself up if you’re starting late. There’s no shame in starting late, and you have a lot of company (almost half of Americnans according to one study). Understand, however, that there’s much more to learn than what’s in this post, so go on a crash learning course to discover as much as you can. You can always adjust your plans as you learn more.

It’s never too early or too late to get started! No matter how old you are, you’ll feel better knowing that you’re saving for your future.