With so many different retirement accounts and so much advice given out online and on TV, saving for your future can be confusing. However, this shouldn’t deter you from saving no matter how old you are or how much money you have. Let’s answer some common questions that you and millions of other Americans may have when it comes to securing their financial future after they are done working.
What Type of Account Should I Open?
Most Americans have either a 401k or an IRA to help them save for retirement. A 401k is an employer-sponsored plan that is available to anyone who is over the age of 21 and meets other minimum employment requirements. Teachers and government employees may have a 403b, which is similar to the 401k. Those who are self-employed may also get a 401k, and they are also entitled to make contributions both as an employer and employee.
An IRA is an individual retirement account, and they are available through a few select banks and financial institutions. Brokerages and other trading platforms may allow you to have an IRA with them that you can use to invest with an eye toward retirement. Generally, you can start to contribute as soon as you are old enough to start making money.
What’s the Difference Between a Roth and a Traditional IRA?
Whether you have a self-directed IRA or 401k, or have one through your employer, you should know the difference between traditional and Roth accounts. A traditional account allows you to use pre-tax dollars to save for retirement. The money grows tax-free until you start making withdrawals by age 70 1/2. With a Roth account, the money used to contribute has already been taxed. Therefore, the money grows tax-free and is tax-free when you starting taking withdrawals.
How Much Should I Save Each Month?
You should aim to save at least 10 percent of your income every month toward retirement. If you have a 401k, your yearly contribution limit is the greater of $18,000 or 100 percent of your wages. Your employer can contribute up to 25 percent of your wages as a matching contribution or 20 percent if the employer is a sole proprietor. IRA savings limits are $5,500 a year regardless of how many accounts that you have. Those who are 50 or older may be able to contribute an extra $5,000 a year to their 401k or an extra $1,000 to their IRA.
When Should I Start Saving?
You should start saving as soon as possible. However, there is no bad time to start contributing to an account as you can still take advantage of compounding interest at any age. You may also be interested in using a self-directed IRA to invest in real estate or other business ventures that may yield large and steady returns that can help you secure your financial future no matter when you start saving.
When Should I Start Taking Social Security?
Currently, full retirement age is 62. Ideally, you will wait until you are that age to start taking benefits as that’s when they reach their peak. However, if you wait until you’re 70, you will actually receive about 76% more in benefits, so there’s a serious argument for waiting to take Social Security. Check out the graph below to see how much you could be getting every month when you retire.
The ability to retire should never be taken for granted. While there is no bad time to start saving, you have to be smart about where you put your money and have a long-term strategy to increase your nest egg today and how to make it work for you long after you have stopped working.