Have you put off starting your retirement savings because you don’t understand things like IRAs, 401(k)s, tax implications and contribution limits?
Don’t be afraid. Although sometimes those things can get a little technical, there are tons of websites with easy-to-follow advice and solutions you can use.
However knowing when should I start saving for retirement is a little bit of a tricky of a question. Lots of people are waiting for a tap on the shoulder or a nudge to let them know when to begin.
Out of all the questions you’ll ever have about retirement, the answer to this one is about as simple as it gets – start now!
When to Start Saving
The reason you should start saving for retirement as early as possible is because you’re going to want to take full advantage of one of your greatest assets, “time”.
You’ve heard of compound interest, right? If you invest $10,000 at the age of 22 and have an average annualized growth of 8% annually, you could potentially have $273,666 saved up by the time you’re 65 without ever doing anything else.
On the other hand, if you wait until you’re 45 years old to make that same investment into that same account, you’ll only have $46,610 when you’re 65 years old.
Do you see how starting early can help your balance to grow significantly larger over time? It’s possible that if you start early enough you could have a very healthy retirement starting as early as age 55 and never have to worry about money ever again!
Don’t Forget to Pay Your High-Interest Debt First
Of course, there are a couple of exceptions to this rule.
First of all, if you have high interest debts, you should pay those off first before you start saving up. After all, the only way you can guarantee yourself to get a 15% rate of return on your investment is to pay off that credit card that charges 15% APR.
The second exception is lack of a “rainy day” or emergency fund. You should have some funds set aside to get by with three to six months worth of unemployment before you start putting your money into retirement accounts where it’s less accessible to you.
How to Save Money for Retirement
There are lots of good ways to achieve financial freedom: Budgeting, investing, earning money on the side, etc.
By far and large one of the best and simplest ways I can think to save your money for retirement: Automate it!
If your company offers a 401(k), have a portion of your money go directly out of your paycheck and into that account. That way you never even see the money or think twice about what else you could have spent it on.
If it’s an IRA you prefer, you can also set up automatic transfers from your checking account to your IRA for easy funding.
The best way to allocate your money is like this:
- If your company offers one, invest into a 401(k), up to the matching program limits. (This will depend on the company you work for.)
- Put the maximum into your IRA, which is $5,500 (if you’re over 50, it’s $6,500)
- Put the maximum into your 401(k), which is $18,000 (if you’re over 50, it’s $24,000) in 2015.
Roth Versus Traditional Retirement Plans
Now, it’s time to look at the different types of retirement accounts: Roth and traditional. Though there are several differences between the two, the most important is the difference in the way taxes are handled between the two.
Roth accounts are funded with income after taxes are taken out. This means that there are no upfront tax benefits, but you will not have to pay taxes when you withdraw it.
On the other hand, traditional retirement accounts are funded with income before taxes are taken out. This means that when you get ready to withdraw it, you will be required to pay the taxes on that income.
How can you decide which of these options is best for you? If you’re just entering the working world, a Roth account may be better suited for you since you’re likely in a lower tax bracket. However, if you’re in a higher tax bracket and anticipate living on less income during retirement, then a traditional account may work out better for you.
Though this seems complicated and you may not want to deal with it, it will be worth it in the long run. You will be able to ensure that your golden years really are golden. Even if you make some mistakes along the way, that’s OK.
The important thing in knowing when to start saving for retirement is to start right away. Regardless of whatever mistakes you may be afraid to make, the longer you wait the steeper the hill you’ll have to climb later in life.
This post was written by my friend DW from The Money Template, a personal finance blog that talks about all things money related.