Invest in Your Future by Saving for Retirement
There is no better investment you can make than in yourself and your future. Experts recommend allocating 15% of your monthly income toward retirement. But you may be wondering where to begin stashing that money away so that it is most impactful for your future.
Before you start exploring your options, you’ll need to set a savings goal. A good way to establish a goal is to take your current living expenses and multiply that by 400. This number will represent how much you need to have saved for living comfortably and independently throughout your retirement. It will give you a rough idea of how much you’d need to sustain yourself in retirement based on a 4% investment return.
There are many investment options to consider for retirement. The most common are 401(k)s, IRAs and Roth IRAs, each of which have their pros and cons. Here’s what you’ll want to look for as you strive to make the most out of your hard-earned money.
This refers to specifically to matching opportunities offered by employers. Many companies will offer to match your contributions up to a certain limit. For example, your employer may offer a 100% match on the first 3% of your salary. If you earn $60,000, that means for the first $1,800 you have withheld from your paycheck and put into your retirement account, your employer will gift you an additional $1,800 in completely tax-free money.
Even if all you do is park that money in something stable like a trust fund, it’s the highest, safest, most immediate return you can earn anywhere in the stock market. Don’t leave free matching money on the table! This should be the first way you invest your money if it’s an option for you.
Here are pros and cons to contributing to a retirement account before taxes are taken out. If a retirement vehicle is considered tax-deferred, this means your money gets contributed before you pay taxes on it, maximizing the amount that will earn interest. No taxes will be charged until the fund is withdrawn. This allows the money to grow, untouched, for years. However, you should still take into consideration that you will be taxed on the amount upon withdrawal, so figure those taxes into your overall budget.
If a retirement fund is tax-deductible, every dollar you put into that fund is subtracted from your taxable income, automatically lowering your taxes for the current year. For people in their peak earning years, this can provide considerable tax savings in the short-term and a great incentive to invest in your future.
Once you have chosen a retirement fund or funds, your next step is deciding where and how to invest the money. Low-risk investment vehicles, such as federal bonds or trust funds, are usually the best choice because they are the most stable over time.
If you are saving for retirement through the use of a 401(k), be sure to check if your employer offers a target date fund. The term “target date” refers to your planned retirement date. You’ll know your employer offers a target date fund if there’s a calendar year in the name of the fund, such as “Company Name” Retirement Fund 2050. Simply make an estimated guess of the year you’d like to retire, and then pick the fund with the date closest to your projected retirement.
A target date fund is a smart choice because it spreads the money in your 401(k) across many investment options such as large company stocks, small-company stocks, bonds and emerging-markets stocks in the short-term. This increases the risk, but also maximizes your earnings.
Then, as you near the target date, the fund becomes more conservative, as your funds transition from more stocks to more bonds, automatically reducing your risks as you near the date of your retirement.
If you haven’t already started investing in your retirement, your first stop should be to speak with an HR representative at your workplace. From there, you can assess your options and make the best decision. With a bit of work and a lot of planning, you’ll have your future secured in the best way possible.