Retirement Planning
Whether you’ve just entered the workforce, you’re comfortably along in your chosen career path or you’re in your final years of working, there’s no better time think about retirement than now. While it may seem like a distant chapter of your life, planning for retirement early on will help make sure you are financially prepared down the road.
When it comes to retirement planning, there are a few different ways to save for your future:
- 401(k) plans: Most employers offer some sort of retirement plan where money is taken out of your paycheck before taxes and put into an investment account. You are not taxed on that money until you take it out of the account. Some employers will match up to a certain percent of your income. Whenever possible, contribute the maximum amount that your employer will match. Also, avoid withdrawing funds from your 401(k) unless absolutely necessary. Early withdrawals will cost you a 10 percent penalty to the IRS and you will be taxed on the amount you take out.
- Individual Retirement Account (IRA): traditional IRAs allow you to save up to 4,000 per year ($5,000 if you are over 50 years old) in a tax-deferred account. With IRAs, you have the freedom to choose what investments you’d like to make with your money and you must begin taking withdrawals at age 70 ½. If you leave your current employer, you can open a rollover IRA to keep the money you have already saved for retirement growing and earning interest between jobs.
- Roth IRA: Unlike traditional IRAs, the money you contribute to Roth IRAs is taxed. However, that money grows tax-free so that when you withdraw funds later, you are not taxed on that money or the interest it’s earned. There are no age restrictions on when you can withdraw money from Roth IRAs.
Regardless of the type of account you use to save, it’s important to save early and save often! Retirement accounts earn compound interest, meaning you earn interest on your principal and on past accumulated interest. For example, if you began saving $1,000 a year at 8 percent interest when you were 25-years-old, by the time you were 65, your account would be worth around $280,000. However, if you wait until you are 35-years-old to start saving, your account would only be worth about $122,000 by age 65.
Retirement Calculators
One of the most challenging aspects of planning for retirement is knowing how much money you will need to retire comfortably. You can't always know what your expenses will be that far into the future. The Nest Egg Calculator will help you determine what size your retirement nest egg should be.
Looking for a way to boost your retirement savings? Increasing your monthtly 401(k) or IRA contributions can save you thousands down the line. Use the Retirement Contribution Calculator to determine how much more you can save each month by raising your contributions.
Related Information:
- Practical Money Skills: Retirement
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