Saving for Retirement – The Basics

Saving for Retirement – The Basics

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What you don’t know can’t hurt you – FALSE.  What you don’t know will almost certainly come back to bite you, especially when it comes to money.  I’m ok with the finer points of astrophysics remaining mystery, but as far as finances go the more you know, the better.

What I wish I’d known earlier is that saving for retirement isn’t an option.  It’s a necessity.  It’s as important as paying your electric bill, or putting gas in your car, even though it seems very far away… in the words of my husband, this is not a “tomorrow problem”, this is a very real today problem that will sneak up on you if you aren’t paying attention.

The point of this post isn’t to scare you, but to give you the information I wish I’d had sooner – that our generation can’t count on Social Security being around by the time we retire, and even if by some miracle it is, it will almost certainly not be enough to keep up the quality of life you’ve come to expect.  With that in mind, it’s on us to put away money while we’re young to make sure we can continue leading the lives we want.

The temptation for most young people is to excuse their lack of saving by saying that they don’t make enough to save anything – and believe me, I’ve been there too.  If this really, truly is the case, then you need to make a change – find another job, get a roommate, or in some way reduce your expenses to give yourself some breathing room.  Saving is viewed by many as a chore, but in reality it’s paying yourself first, and making it a priority is only going to help you in the long run.

Now this part might be hard to swallow, but here’s the truth: if you have an iPhone, you have money you could be saving.  If you get your nails done, go hunting, fishing, shopping, or out to happy hour, you have money you could be saving.  In a world that bids us to “treat yo self”, the list of excuses we give ourselves to spend instead of save is endless, but it doesn’t change reality – if I can afford to go to Vegas, I can afford to save for retirement.

Once you get past the question of whether you can save, there are even more questions on how – do I put it in a savings account?  Invest in stocks and bonds?  Stash money under my mattress?  There are a few typical vehicles for saving for retirement, and the first one I’ll touch on is an Individual Retirement Account, or IRA.  These are offered by most banks, and allow you to contribute a certain amount of money each year toward your retirement.  You can own multiple accounts, and within the world of IRA’s there are a variety of options, so do some digging and find out what makes the most sense for you.

Many companies offer what’s called a 401k, which is a retirement savings account sponsored by your employer.  This is probably my favorite saving method, just because it’s so easy; you set up a designated amount to come straight out of your paycheck, and it goes into savings before you have a chance to touch it.  Many companies also do what’s called an “employer match”, which means they will contribute a certain amount to your retirement as well.

Some companies will give you a one to one match, meaning for every dollar you put in, they’ll contribute a dollar as well – others will match up to a certain percentage of your total salary.  This is always a good question to ask when you’re looking into a new job – do they have a 401k, and if so, do they have an employer match?  If the answer is yes, ALWAYS max out that employer match whenever you can – it’s free money!

The other benefit of a 401k is the ease of changing it – if you start out contributing 5% of your paycheck to it, and later decide to contribute more, most have online platforms now that you can sign into and make changes automatically.  If not, a quick chat with your HR and a simple form can do the same thing.

There are also options to contribute in different ways; a Traditional IRA is tax-free when you contribute, but you will pay taxes on it when you withdraw funds down the road.  With a Roth IRA, you pay taxes on your contributions, but the money you withdraw down the road will be tax-free.  Keep in mind that this money is going to earn interest over time, so while the traditional method has its benefits, you’re eventually paying taxes on more money down the road, where the Roth earnings will generally be tax-free.

I personally contribute to both types within my 401k, but am definitely planning on leaning more heavily on the Roth as I continue to contribute more – why pay more taxes later on more money?  There are also a variety of funds you can contribute to within your plan – typically the recommendation is to put more towards growth when you’re younger, because you can bear more risk.  As you get older, you’ll want to adjust so that your plan is a little on the safer side – there are a lot of options out there, but a quick chat with HR or your plan representative can shed some light on the subject if you’re not confident with your picks.

There are a million plans out there, SIMPLE IRA’s (Savings Incentive Match Plan for Employees), Tax-Deferred Annuities (TDA), Tax-Sheltered Annuities (TSA), the list goes on… the important thing is to find out what your employer offers, use is wisely, and to get your own if they don’t offer one.  Saving a few dollars out of your paycheck now means that it will gain interest over time, so the more you can contribute earlier, the better off you’ll be down the road.  Even small contributions in your 20’s are going to have a bigger impact than giant contributions in your 40’s, so save early and save often!

Another thing to keep in mind is that when you move jobs, you should “roll over” your old plan into your new one, and continue to grow that money.  I can’t tell you how many people I’ve talked to that have forgotten about old plans they contributed to – if you aren’t rolling it over, you aren’t going to remember about it several decades from now, and that’s money left on the table.

Some rollovers have certain catches so make sure you do your research – 401k to 401k is usually no problem, but once I had to roll a SIMPLE IRA over into a 401k, and I had to wait until the SIMPLE account was 2 years old or face a huge penalty on “withdrawing” that money early, even though it was going straight into another plan.  The goal here is to arm yourself with information, so you can’t be caught off guard – the more you know, the better.

I’ll wrap this up by saying that I’m still setting goals for myself in the retirement savings department – my journey is still in progress.  Do what you can, and think hard about where your money is going.  If you get a raise or bonus, consider putting additional money towards your retirement instead of that jet ski… at the end of the day, this is money you’re setting aside to take care of you, and while it’s not as flashy as a jet ski, it’s going to last a heck of a lot longer.

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