The amount you need saved for retirement will vary depending on your situation. However, putting as much away as possible will help you avoid a gap in savings.
Matching Contributions
Many employers offer a matching contribution for employee contributions to 401(k) plans. This is additional money from your employer that increases the value of what you are saving for retirement. This can sometimes be as much as 50 percent of your contribution. Experts say you should save enough to get the full employer match to maximize the value of your retirement savings. This is free money that you cannot afford to pass up.
You should also set aside enough to max out your 401(k) and other tax-advantaged retirement accounts.
Your 401(k) plan rules will determine how much you can contribute. Your company may impose a vesting schedule that governs when you get to keep employer-matched funds. For example, some companies have cliff vesting that requires you to work for a certain number of years before you can take your employer-matched contributions with you when you leave. Others have graded vesting, which grants you ownership over your matched funds over time (e.g., 20% after the first year of employment, 40% after the second year, and so on). With pensions fading out and Social Security replacing only a portion of your preretirement income, saving as much as possible during your working years is more important than ever. Taking advantage of the benefits of a 401k plan and other tax-advantaged retirement savings options can help you make your dream of financial independence a reality.
Tax-Deferred Savings
Many Americans dream of a relaxing retirement spent lounging on the beach, enjoying hobbies, and spending time with family. However, retiring with enough money to live comfortably is a challenge. In fact, according to T. Rowe Price, most people need at least 11 times their final salary saved to survive through retirement. While saving enough for retirement may seem impossible, some strategies can help you get on track. One of the best ways to do this is by taking advantage of a tax-deferred savings account.
A 401(k) plan is an employer-sponsored retirement savings account that allows you to save with before-tax income. This means you only pay taxes on the funds when you withdraw them in retirement (if at all). This structure is particularly beneficial if you are in a high tax bracket now but expect to be in a lower one in retirement. In addition to the benefits of a tax-deferred savings plan, investing your funds in diversified investments can help you reach your retirement goals. A combination of stocks, bonds, and mutual funds is recommended to safeguard against potential market declines. Compounding is the magic that happens when your invested funds produce earnings reinvested into the fund. This is why it’s so important to invest regularly and to start as soon as you can.
Flexibility
While saving enough to retire may feel daunting, the more you save and invest early in your career, the better off you’ll be. That’s because the money you put away now will have decades of compounding to help it grow.
If your employer offers a retirement plan, contribute at least enough to take advantage of the match. Typically, your contributions come out of your paycheck before federal income taxes are applied, so the more you contribute to your workplace plan, the less taxable income you’ll have (plus any applicable state and local income tax or Social Security and Medicare taxes).
Many employers offer a traditional 401(k) or a Roth 401(k) account. A traditional 401(k) involves pretax savings that give you a tax break at the time of contribution and reduce your taxable income.
Most 401(k) plans include investment options, including stock and bond mutual funds. You can choose the mix that best fits your financial situation and risk tolerance, and some plans offer target-date funds that automatically allocate your investments based on how close you are to retiring.
Retirement Planning
401(k) plans are a great tool for automating retirement savings and investing. Many of these accounts offer a range of options and allow you to customize your investments. You can request that your investments be a certain percentage of stocks or bonds; the plan usually automatically rebalances them. Some employers match your contributions up to a set percentage of your salary, which is free money that grows tax-deferred thanks to the magic of compound interest. It’s important to try and save enough to take advantage of this. You’ll be glad you did when you’re retiring and need to replace a significant portion of your preretirement income.
If your employer doesn’t offer a matching contribution, you should still strive to save as much as possible. It’s hard to know exactly what you need to retire comfortably, but you can use a retirement savings calculator to play around with some numbers. Whether saving in a 401(k) or an IRA, try to make it a habit to save regularly. Increasing the amount you save by just a few dollars each month can dramatically increase your retirement nest egg. Another way to boost your savings is to examine your budget.