Saving for retirement allows you to transition from working to retirement life easier without giving up too much on your standard of living. A retirement savings account is a place to build your nest egg for the future. With so many retirement solutions out there, it can be confusing to know the best way to save for retirement.
This article will talk about retirement strategies to consider when you want to save money towards this financial goal.
Why Saving Early for Retirement Matters
There is no time like the present when it comes to starting your retirement savings account. A Chinese proverb that sums it up is, “The best time to plant a tree was 20 years ago. The second-best time is now.” Three key benefits of starting your retirement savings earlier include:
- Time is money. The power of compound interest works to your benefit even if you don’t have a lot of money to invest initially. For example, if you invested $1,000 at the age of 30 with a 5 percent annual return rate, it would grow to $5,416 at age 65. If you invested that same amount at age 40 with the same return rate, you would have $3,386 instead of 65.
- You lose out on the opportunity. Retirement solutions like 401k investments allow you to contribute up to a certain limit each year towards your retirement. Not making these tax-advantaged retirement vehicles means that you are missing out on making these contributions every year.
- More protection from market trends. Playing the long game when it comes to investing for retirement will provide you with better opportunities—investors who have a shorter time horizon before retirement risk higher chances of experiencing negative returns.
Best Retirement Plans to Start
The best way to save for retirement is not opening up a separate savings account and pouring dollars in there. The average interest on a savings account is 0.05 percent, according to the FDIC. That’s not even going to keep up with inflation each year. Your retirement solutions that should be considered include individual retirement accounts, 401k investments, and stock investment.
Open an Individual Retirement Account
Traditional and Roths are the two most popular types of individual retirement accounts out there. These are among the best retirement plans to put your savings to work for you. You can only have one of these accounts.
The main difference between the two is that you use pretax dollars to fund the account with a traditional IRA. That means you will pay income taxes on the money once you start withdrawing it from the account during retirement. Your contributions might be deductible from your taxes. Conversely, Roth IRAs use after-tax dollars, so withdrawals are not taxed during retirement.
Employer-sponsored plans such as a 401k are often offered as a benefit to employees. When you sign up, you can determine your paycheck percentage that will go towards this investment account. You get the benefit of automation here, where that specified amount is automatically invested out of your paycheck. Some employers may even offer a matching contribution up to a specified percentage.
Investing in the stock market is another great way to build retirement savings. If you feel comfortable buying and sharing stocks on your own, you need to open an investment account that provides the platform.
Robo-advising has become a popular option with advancements in technology. When you open a Robo-advising account, you are asked several questions about your investing goals to build the portfolio to help you achieve them. It costs a fraction of what it does to hire a financial advisor.
When to Hire Retirement Plan Consultants
Don’t count out hiring professionals as part of your retirement strategies. Retirement plan consultants are experts in building wealth on your behalf. Additionally, they can be treasured for certain life events that lead to a windfall or huge loss. Some of these major life events include:
- Recently married and need help as a couple of managing finances
- Recently divorced or widowed and need help understanding how to move forward as a single person financially
- Received an inheritance that you need advice on how to invest the money
- Retirement is close, and you want to make sure your saving for retirement is on track