Now you are probably thinking… I am only in my twenties. I don’t need to worry about retirement for another 30 years. False! You should start saving now! Most of you probably just got your first “real” job and you are ready to buy a new car, flat screen TV or smartphone. But what you need to understand is that these are the accumulation years! Though it may be scary to think about, saving for retirement at an early age is essential. Most twenty-year-olds do not even have retirement planning on their radar screen. According to the Wall Street Journal, “If you save $10 a day at age 25, you’ll have more than $1 million by age 65, assuming an 8% annual rate of return. If you start at age 35, you’ll have $445,000. At age 45, you’ll only have $180,000.” I don’t know about you, but I’d rather have $1 million.
To start, lets break down the three major retirement accounts:
IRA stands for individual retirement account. With an IRA, you can save for retirement separately from your standard savings account. In a traditional IRA, tax on the contributions is deferred until retirement. You can access the contributions you make before distributions begin at age 70 ½ without a penalty, but you do not have access to the interest earned without facing a penalty.
Like a traditional IRA, you can save for retirement in a Roth IRA, but this account differs in taxes, access and distributions. Contributions to a Roth IRA are after tax, so you won’t pay taxes at retirement. You can access the funds tax and penalty free if the account has been open for 5 years and if you meet certain requirements. The funds in the account will continue to grow until you want to begin distributions.
A 401(k) is another way to save for retirement, but this is not an account you can open at your credit union. Instead, it’s a plan with your employer that allows you to save a portion of your paycheck and earn tax-deferred interest on it. Your employer may also contribute to the account and sometimes they’ll even match your contributions. You can think of these matches as free money, because for every dollar you save, your employer gives you one as well. If you want to withdraw from this account early, you’ll pay taxes and a penalty.
Where do I begin?
- Start Early
There is no substitute for starting early. Take advantage of potential matching employer contributions to get “free money.” If you’re invested in a traditional 401(k), you can allow your pretax contributions to grow without a tax hit until you withdraw the money once you retire.
- Create a Budget
Understand what you’re really spending each month. Check out www.Mint.com to help track your finances! This will help you find ways to save and budget dollars toward your retirement.
- Save A Little. Save Often
First, decide on an amount to put aside each month. Many financial planners recommend that you save at least 10% of your annual income for retirement, starting in your 20s. If 10% is too much, start smaller and as you age that percentage can grow—to 15% to 20% in your 30s. Use this to establish a rainy day fund!
- Build an Emergency Fund
Try to set aside an amount equal to three months’ income in a savings account. This emergency fund will help you during those hard times instead of dipping into your retirement savings.
What questions do you have about saving for retirement? For more information about retirement click here or talk to someone at your credit union!
For a visual understanding of how much you can save for retirement, click here!
Until Next Time,