Investing for retirement savings is one of the most critical topics in personal finance. It involves how much a person can save, how they save, and what kind of options and resources they have to make the most of their savings. Getting this right will maximize your chances that you can have a relaxing and financially secure retirement.
Start Contributing as Early as Possible
The best place to start with retirement savings is to start contributing to some sort of retirement account as early on as possible. Even if the amount is small, being able to start early means that the savings can spend more time growing. In addition, as your salary increases from year to year, it will become easier to contribute and save more.
Everyone has Access to the IRA
Everyone has access to at least one form of retirement savings account. This is the Individual Retirement Account, or IRA. An IRA is an investment account that has a tax advantage. Most investments are subject to two kinds of taxes– first, the money is taxed under regular payroll tax once you earn it as a salary. Then you invest that money, and later, you sell the investments and withdraw the profit. That withdrawal is also taxed.
If you put the money into an IRA and invest within that, you can avoid one or the other of the taxes depending on whether it is a traditional or Roth IRA. The specific type does not matter too much, but the benefit of being able to reduce the taxes on savings is a major advantage. In addition, it allows for the investments to grow faster and more easily.
Understanding the Annual Limit
These accounts have an annual limit, and contributing to that limit will lead to a good amount of retirement savings. In the account, you can choose what to invest the money in. Ideally, this is a set of assets that will grow in value over time. The combination of contributions from you and the growth of the assets should create the overall stock of money that will provide the funding for retirement. Investing earlier means that the assets and the money have more time to grow with compound interest.
The first and most important choice to make is how much to put into these accounts. As mentioned above, everyone has access to an IRA, and some people will also be able to use a 401k, 403b, or similar employer-based plan. These work the same way as IRAs in terms of tax savings. They have a separate limit and may come with employer contributions that can help you save more. Getting as much as possible out of these accounts and getting as many contributions as possible is a good goal to have.
Choosing Where to Invest
Beyond just contributing money to the account, there is also the question about how to invest it. Generally speaking, there are two forms of assets where most people invest– stocks and bonds. Stocks are pieces of a company’s ownership, and they tend to be more volatile. They can grow at a higher rate, but they also come with more risk of losing their value. On the other hand, bonds are steadier in value and do not grow as fast, but they also come with less risk. The best choice is one that makes you feel the most comfortable about the combination of risk and the rate of return, which will involve a blend of both stocks and bonds.
This is something that can change over time. For example, younger people have more time ahead of them, and they want their assets to grow as fast as they can. That means they will benefit more from stocks and might want to have a higher ratio of stocks to bonds in their portfolio. On the other hand, older people who are approaching retirement have accumulated a lot of value in their assets. Instead of trying to grow, they generally want to preserve the value they already have. That means they might want to have more bonds than stocks.
Calculating the Best Ratio for You
There are lots of different rules of thumb and other approaches to decide which ratio is the best fit for you. A conversation with a financial planner or advisor is a good place to get started. For learning how a set of assets will grow over time, you can do all of that with an online compound interest calculator. Enter the starting point as the principal, along with the additional monthly amount that you will contribute to the account. Then put the rate of return on the investments as the interest rate, and you will be able to calculate out what the assets might be worth at any point in the future based on your assumptions.
This calculator does not provide a guaranteed prediction of your specific outcome, but it can guide you. If you want to reach a certain goal, you can see what kind of monthly or yearly contributions you need to make in order to reach that goal. This is an important step in framing your plans from a financial perspective. As a worker, you need to balance saving for retirement with other financial priorities like child care, a car, and housing.
Start Planning for Retirement Early
The earlier you start thinking about retirement savings, the easier it will be to make a plan and save in accordance with your goals. This is something that can seem distant and abstract, but the earlier the action takes place, the easier it will be to feel satisfied with the retirement plan. Retirement can be complex to understand at first, but learning about the power of early contributions and how they grow through compound interest over time. It is that growth that makes retirement possible, and committing to the plan early on is a key way to build up that momentum that will carry through to the goal.
There is nothing like feeling secure in the retirement plan you have and knowing what adjustments to make and when to make sure that you stay on track as the years go by, and knowing how that will benefit you in the end.