Takeaways
- Millions of Americans are behind on their retirement savings.
- Deciding when to start saving for retirement is one of the biggest hurdles.
- Retirement savings habits established early will help build investment momentum.
- Regular check ins on your retirement accounts helps keep a pulse on progress.
- Compound interest and early retirement savings will make retirement saving easy.
Saving for your future is one of the smartest financial moves. Retirement savings are a vital component of your overall financial health, and the best way to start saving for retirement is to start planning now. Finance experts and financial advisors agree saving for retirement should be a top long-term financial goal.
Even if you have already started saving for retirement, deciding what type of retirement account to open can get complicated quickly. We are going to keep this simple because the fact that you are saving for retirement means that you are on the right financial footing.
What is Retirement?
Retirement is the act of leaving your job and stopping work. While retirement can seem incredibly far off for young professionals, making it difficult to start saving for retirement, the irony is that the sooner you start saving for retirement, the sooner it will be here.
Learning to invest when you are young and saving for retirement will increase your financial health and net worth. Over time, investing in retirement will give you more financial security and peace of mind.
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Decide Now Is the Time
The first step to learn how to save for retirement is to decide that now is the best time to start the process. There is no perfect time to start saving for retirement. Adjusting your spending patterns, budgeting, and setting financial goals will help you get started.
Early in your career, you will have competing priorities for cash that should fund retirement savings. And because retirement feels like a distant goal, it can be easy to feel like you can defer saving for retirement until later. Personal finance experts disagree.
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Starting to invest early and often can remove the weight of having to scramble later in life. In a recent study, money psychologists have shown participants aged versions of themselves are more likely to begin contributing up to 10% more to their savings plan.
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Determine How Much to Save
Every dollar counts. Even if you feel that what you could contribute immediately toward retirement wouldn’t add up to much, it is worth starting. Saving $25, $50, or $100 a month can grow to serious savings over time. You can save millions of dollars in retirement funds with compound interest and continuous reinvestment.
If you start investing for retirement early, the odds are stacked even more in your favor. By taking advantage of compound interest, you can accelerate your total returns.
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Smart Tip:
If you invested the 2023 401(k) contribution of $22,500 today into the S&P 500 and contributed that amount every year for 35 years, based on an 8% annualized rate of return, your retirement investments would be worth over $4,200,000.
Depending on how much you already have saved for retirement, you can calibrate your approach to saving. Those serious about investing early for a great retirement should focus on investing 10%-35% of your income toward retirement. Additionally, you should take advantage of any employer-sponsored 401(k) matching contributions (more on this later)
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Select Your Retirement Account
Here is a list of typical retirement accounts and their contribution limits:
1. Roth IRA: As of the tax year 2023, the maximum contribution limit for a Roth IRA is $6,500 for those under 50 years old and $7,500 for those 50 years or older. Roth IRAs are terrific tools for investing post-taxed monies into stocks, mutual funds, and other investments.
2. Traditional IRA: As of the tax year 2023, the maximum contribution limit for Traditional IRAs for those below 50 years old is $6,500 and $7,500 for those 50 years old or older. Traditional IRAs present a tax-deferred way to save money early in your career before contribution limits are phased out.
3. Employee Sponsored 401(k): As of the tax year 2023, the maximum contribution limit for an employer-sponsored 401(k) for those below 50 years old is $22,500 and $33,000 for those 50 or older. Employer-matching contributions are funds added to your 401(k) by your employer in addition to your cash contributions to encourage employees to save.
Take advantage of any free matching contributions through an employer-sponsored plan. According to recent Vanguard data, approximately 80% of employee-elective deferral programs require participants to save between 4-7% of their pay to receive the maximum employer-matching contribution [1]. Luckily, over 50% of companies also allow for automatic vesting of your employer-matching contributions. This means you automatically accrue the benefits of those funds in your 401(k) if you choose to leave the company.
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For example, some companies offer 4% or more of your salary in matching contributions (up to a predetermined cap). An employee who earns $100,000 may save $22,500, with the employer adding an extra $4,000 of matching free contributions for a total 401(k) savings of $26,500.
Choose an Online Brokerage Account
Now that you have decided to begin saving for retirement and determined how much money you want to save, it is time to decide which online brokerage to choose.
There are a variety of popular retirement accounts, each with its advantages and disadvantages. Here is a list of popular online brokerage accounts:
- E*TRADE
- Vanguard
- Fidelity
- Charles Schwab
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Determining where you want to send your hard-earned money can be extremely important. Consider ease of use, incentives, and account flexibility.
Remember that some employee-sponsored 401(k) accounts will make you sign up with a particular online brokerage. For ease of access, it may make sense to hold all your retirement accounts, like your Roth IRA and Traditional IRA, at the same online brokerage.
Decide How to Fund Your Account
Financial planning is all about making tradeoffs. Deciding to save for retirement is a big step on your financial journey, and determining how to fund your account is critical.
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Are you going to fund your retirement accounts completely through employer-sponsored plans?
Are you going to build a side hustle to earn more money and fund your accounts with your extra funds? Are you going to combine your approach?
These are all questions that need to be determined as you begin saving for retirement and deciding where to invest.
Choose Your Investments
Saving money into a retirement account is not investing for retirement. It is important to remember that once funds are deposited to your Roth IRA, Traditional IRA, or 401(k), you still need to choose what type of investment to make.
The flexibility to invest in different types of stocks, exchange-traded funds, mutual funds, target date funds, or alternative investments is the greatest in Roth IRA or Traditional IRA accounts. In contrast, 401(k) plans typically offer a select menu of investments, mutual funds, ETFs, and target date funds (the most popular).
When choosing an investment for retirement it is critical to keep the time horizon of your investment at the forefront of your decision-making process. That is why target date funds, which target a retirement date and automatically change your investments to meet that date are popular.
Automate The Process
Technology should be leveraged. In 2023, it makes complete financial sense to leverage the technology available to us to maximize our financial goals. Automating your retirement savings can remove decision fatigue from your financial framework and increase your likelihood of achieving those goals.
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Creating recurring and automatic deposits to your retirement accounts can be set up at the beginning of the process. This will allow you to get comfortable with the amount of money you are saving for retirement. If you are saving for retirement for the first time, this adjustment to your take-home income might require some personal spending calibration.
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In other words, if you are saving $100 per month toward your Roth IRA, those are funds that you cannot spend today. Getting used to spending $100 less per month may take some getting used to, but over time you will become acclimated to your new discretionary income.
Create Check-in Times
Although learning how to save for retirement can be challenging at first, the earlier you start saving for retirement the better. Saving for retirement can change your outlook on the future. Once you start hitting your contribution limits, you will have the taste of success. Watching your money pile up will reinvigorate your other financial goals.
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By adapting your life to meet these goals, you will better your financial position. However, it is important to regularly check on your accounts to ensure you don’t need to dial up or dial back how much you are contributing to each retirement account. Put these regular check-in points on a calendar every quarter. Once you get comfortable with the process, you can gradually space them to semi-annual check-in points.
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What is a Mini Retirement?
The idea of retirement has changed significantly over the last several decades. Young working professionals want to retire earlier, work less, and transition careers more often.
This has led to the idea of taking mini-retirements throughout your career. Mini retirements have surged in popularity because they advocate multiple career breaks to rejuvenate employees, change industries, or recalibrate where work sits in their priority structure.
When you plan your retirement goals, consider your life goals. Planning for retirement well into the future has been a tried-and-true strategy. Aligning your financial goals with your life goals and saving for retirement, whenever it may come, will seem a matter of course.
Smart Summary
Planning for retirement takes years of hard work and consistent savings. Setting up a savings process to help you take advantage of free money, like 401(k) employer matching contributions, helps grease the wheels of your saving machine and boosts your ability to reach the finish line. Whether you want to plan for sabbaticals, mini-retirements, or achieve financial independence early, setting up your financial goals and consistently monitoring your progress is a smart money move.
[1] Vanguard. How America Saves 2022. Last Accessed October 2, 2023.
