We all need to plan for our retirement. We know it is important, yet all too many of us fail to plan adequately or save enough. We may see it as too intimidating, too complicated, or too confusing and would prefer to procrastinate or ignore it entirely. However, our retirement date will come whether we plan for it or not. So it is vital that we plan properly and save enough to enjoy happy and healthy retirement years. Here are several common questions about Retirement that can help shed some light on various important aspects of retirement planning and saving.
1. Should I Save for Retirement or My Child’s Education First?
While it may be tempting to save for educational expenses first, there are many reasons you should focus on saving fifteen percent of your income towards retirement as early as possible. One of those reasons is compounding interest. Saving early is the only way to take full advantage of the massive growth in your retirement accounts that will accrue over time due to compounding interest.
2. Should I Choose a Traditional IRA or Roth IRA?
There are legitimate pros and cons to each type of IRA account, and it is essential to understand them to select the right one for your needs.
A traditional IRA might be the right choice if you are looking for a way to reduce your taxable income during your working years. The contributions you make to a traditional IRA are tax-free, but keep in mind you will need to pay taxes on any money you withdraw during retirement.
If you would rather not have to worry about paying income taxes during your retirement and are less concerned about reducing your taxable income during your working years, then a Roth IRA could be the ideal choice for you. With a Roth IRA, you pay taxes on the income you contribute but are not taxed again when you withdraw it later during retirement.
3. What Should I do After Reaching My Employer’s Match?
Reaching your employer’s match is a beneficial way to boost your retirement savings with what is essentially free money. You deposit up to a certain amount and your employer deposits a corresponding amount, often a percentage of the amount you deposited. This can give you a significant leg up in the retirement savings process.
After you reach your employer’s match, continue to save for retirement. To find the best way to do this in terms of tax benefits, see the above question, where we discuss the pros and cons of traditional IRAs vs. Roth IRAs.
4. What Does it Mean to be Vested in My 401(k)?
Being vested in a 401(k) plan means that you can take your contributions with you when you leave the company. This includes all of your employer’s matching contributions that we discussed in the above question. You are entitled to those contributions and should know how to gain access to them and take them with you when you leave. You can consult with your company’s Human Resources department to find out how they handle these sorts of transfers.
5. How Much Should I Save for Retirement?
The answer to this question depends on the lifestyle you desire for your retirement years, and when you anticipate retiring. People have been living longer in recent years, which has led to the need for increases in retirement savings and excellent performance of any investments.
However, most people opt to save a percentage of their income for retirement. The amount will depend on what you can afford and how much you earn. As a rule of thumb, saving 15% of income is a good minimum, and anything above that is even better. If 15% seems unattainable, don’t worry. Just start with something like 5% and then gradually try to increase your contribution amount over time from there.
The best way to determine whether the amount you are saving will be enough to live the lifestyle you desire is to talk to an investment advisor, wealth manager, or financial planner. This is because you need to take into account what type of investments the money will be invested in, and what sort of interest rates and income you can depend on based on the expected performance of those investments. That being said, there are some retirement planning calculators online that can also prove helpful in place of working with a professional.
6. What if I Can’t Afford to Save for Retirement?
It is incredibly vital that you find a way to save for retirement. While there may indeed be times in life when things are just too tight to save anything for retirement, the truth is that most of us lack the self-discipline to make the necessary sacrifices to save adequately for our retirement.
If your current budget does not allow for retirement savings, try to examine it and see if there is anything you can cut out or reduce to free up some money for your retirement savings. If you are unable to find anything, try to see if there are ways you can increase your income, such as by taking extra shifts at your job or taking on a side job. If you get creative, there are many ways to bring in some side income to help with retirement savings.
Hopefully these answers have helped to answer some unanswered questions you had about retirement. Regardless of where you are in your career, it is essential to start saving for retirement today if you haven’t already begun. By beginning early, you give your contributions the maximum possible amount of time to grow, which will be a tremendous advantage when your retirement date rolls around.