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How to Save for Retirement

Retirement on the beach
How Much Do I Need to Retire? And Other Questions Answered.

Retirement—that’s a future-you problem, right? The truth is, it’s never too early to start saving for your golden years. Navigating the complex world of IRAs and 401(k)s can certainly be daunting, but the worst thing you can do for your future self is nothing at all. That’s because, as far as social security goes, there’s more money going out than there is coming in. With so much uncertainty around the program, it’s better to plan for your own financial freedom than to rely on assistance that may not be around by the time you reach the age of retirement.

In this post, we’ll walk through how to save for retirement—whether you have a company sponsored plan or not—and how much you’ll need to save to live comfortably. But first, let’s talk about the power of compound interest.

Work Money Smarter, Not Harder

Compound interest is the reason it’s recommended you save for retirement using a retirement account instead of stashing money under a mattress or in a high-yield savings account. Sure, there are tax benefits to using a retirement account, but nothing will make your money grow as quickly as compound interest.

Take the following example: Say Person A put $500 per month into a high-yield savings account for 20 years without touching it. For the sake of simplicity, let’s assume an annual percentage rate (APR) of 0.5% throughout the life of the account. After 20 years, Person A would have just over $126,160 saved in their account—with more than $6,160 of that coming from interest alone.

Not bad!

But let’s look at Person B, who invested $500 per month over 20 years into a Traditional IRA. The rate of return ultimately depends on the account holder’s risk tolerance and investment portfolio, but let’s assume a reasonable target of 7% annual growth. If Person B consistently added to their IRA without ever touching it, they’d have nearly $245,975 by the end of those two decades.

Like Person A, Person B would have invested roughly $120,000 of their own money. In the case of Person B, however, the interest accrued over the same amount of time would more than double what Person B put in.

Of course, when it comes to a savings account, Person A is free to take as much of their money out as they desire without paying tax penalties. Person B, on the other hand, will be subject to certain rules and restrictions—including a minimum age at which they may draw funds—that could result in their accounts being heavily taxed.

For many people, that’s the point. Not only will their money grow exponentially bigger when it’s held in a retirement account—they will also be incentivized to delay the gratification of pulling out their money until it’s actually time to retire.

Employer-Sponsored Retirement Plans

For many people, employment is a gateway to saving for and learning about retirement. Retirement plans are a mainstay benefit in the corporate world. Whether it’s some kind of a company-sponsored IRA, 401(k), or 403(b) for non-profit organizations, employer retirement plans usually incentivize people to save by offering a company match. Be it 2% or 8%, you should maximize your contribution as much as is possible for your budget.

The money you contribute to your plan will be taken from your paycheck pre-tax, so you won’t even notice it’s gone until you track that line down on your pay stub. The money that comes from your employer, on the other hand, is essentially free and will be contributed to your account from your company’s pocket. That’s why you should always read the fine print to ensure you’re contributing enough of each paycheck to receive the full employer match from your company. After all, it is free money—and your future self will thank you for that.

Human resources departments are generally tasked with ensuring you are adequately briefed on the retirement options available to you through your company. Of course, that’s not always going to be the case. If you find yourself in a small company with limited HR—or worse, no HR at all—then don’t hesitate to contact a representative from your employer’s chosen wealth management company.

Initiating these kinds of conversations can feel awkward—especially when you feel like you have zero clue what you’re talking about—but it’s important to remember these representatives are here to help you demystify the needlessly complicated world of retirement savings. Take the time to reach out, ask questions, and accept the help. Knowledge is power—especially when it comes to your financial literacy and wellbeing. And don’t worry—nobody’s going to send you a bill until you start asking them to actively manage your funds. In that case, be wary of how those fees add up over time.

Self-Employed Retirement Plans

Working for the man isn’t for everyone. But anyone who owns their own business or works for themselves will tell you: the business side of things is hard work. In addition to calculating taxes and keeping up with proper licensing and certifications, small business owners must also manage their own retirement funds and often the account plans of others. That doesn’t mean the self-employed are without options, though.

Individuals with zero employees can open a Traditional or Roth IRA and contribute up to $6,000 annually. Businesses with up to 100 employees can offer a SIMPLE IRA, to which individual contributions and employer matches can add up to an annual limit of $19,500 per person. These aren’t the only options for self-employed or small-business retirement plans, but they do tend to be the most popular.

Show Me the Money

How much to save for retirement is one of those elusive questions that generally ends in vague answers like, “Well, it depends!” As annoying as that may be, it’s true. The amount of money you need saved for retirement will depend on a number of factors, including what your goals are for living out your golden years. For some, that means traveling the world. And for others, that means staying close to home to spend as much time as possible with their grandchildren. It’s important to be clear about what you’re trying to achieve, but don’t assume the homebody life is for you to such an extent that you never bother to save some fun money. In retirement, balance and flexibility are key.

Other factors that impact the amount of money you should save for retirement include asset ownership. For example, will your house be paid off by the time you’re ready to close shop professionally? Monthly mortgage payments are a significant chunk of the average U.S. American’s monthly income, so striking that expense from your monthly budget can make all the difference in your 65-and-over spending. Same goes for any outstanding credit card debt or loan repayments. It’s not always possible, but, ideally, you’ll be strolling into retirement as close to debt free as possible. This will help ensure your savings keep you comfortable for the rest of your years.

On that note, it’s important to remember that people are living longer lives now than at any point in human history. This is great news in general, but it also means people are being tasked with saving more for retirement than had previously been the standard. And on top of needing more money to buoy people through longer lifespans, inflation continues to throw a wrench into things. This retirement calculator is a great tool for evaluating where you’re at and how you might adjust your strategy to better meet your goals. It enables you to adjust income, life expectancy, monthly contributions, and more—all while accounting for inflation and a sensible 2% annual salary increase.

Ready to get in the driver’s seat when it comes to your retirement savings goals? Contact the Keesler Financial Group to explore your options for saving and building wealth. And don’t forget: retirement is never a one-and-done endeavor. Get in the habit of regularly checking in with your accounts and revisiting your savings plan wherever necessary. The more familiar you are with your retirement account, the more empowered you’ll feel to take charge of your savings goals and reach financial independence on your own terms.

Investments not insured by NCUA.

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