Saving for retirement is one of those things that everyone knows that they need to do, but many people aren’t sure how or when to start. If that sounds like you, here are five different ways that you can get started on your retirement savings. So no matter where you are on your journey towards retirement, take a look at these actionable steps to help you take one more step along that road.
Resolve to start today
An old proverb says that the best time to plant a tree is twenty years ago while the second-best time is today. While it is true that the best time to start maximizing your retirement savings is when you’re young, that’s also the time when people generally have the least amount of spare money to invest. So if your retirement account balances aren’t as robust as you’d prefer, resolve to start today to start saving a little bit more. No matter how old you are or how close you are to retirement, it’s never too late to start saving.
Contribute to your 401k plan, especially if your employer matches
Another great vehicle for retirement savings is the 401k plan, named after section 401(k) of the United States tax law that authorized their creation. 401k plans are sponsored and administered by employers, and they allow you to get a tax deduction for any of the income that you contribute. You can sign up for a 401k plan through your employer, generally through the HR or payroll departments. You elect how much of your pay you want to contribute each pay period, and that amount is subtracted from the amount you have to pay tax on.
There is a limit to the amount that you can contribute to your 401k each year, which is typically indexed for inflation. In 2020, you can contribute $19,500 of your income. In addition, if you’re 50 or older, you are additionally allowed to make what are called “catch-up” contributions. In 2020, those 50 or older can contribute an additional $6,500 of their income.
Many employers choose to make contributions to the 401k accounts of their employees. In many cases, this is structured as a match to employee contributions. One example of this might be an employer who offers a 100% match on the first 3% contributed to a 401k and a 50% match on the next 3% contributed. If your employer matches 401k contributions, that should be just about the first place you start investing. An employer match is the nearest thing to free money.
Open an IRA
Another great way to get started with retirement savings is by opening an Individual Retirement Account (IRA). There are two main types of IRA – a traditional IRA and a Roth IRA. The two types of IRAs are similar in that they are both vehicles to help you save for your retirement, but they have a few important differences. A traditional IRA works similar to a 401k plan – you don’t pay tax on any money contributed now, but you will pay tax in retirement when you withdraw it. A Roth IRA works in reverse – you contribute now with after-tax money, but then you don’t have to pay tax on any of the contributions OR growth of your IRA when you withdraw it in retirement.
Just like with 401(k) plans, if you’re 50 or older, you may also be able to make catch-up contributions. This can allow you to contribute more than the maximum to your IRA. In 2020, workers who were eligible to make catch-up contributions could contribute an extra $1000 to their IRAs.
Set up automatic contributions, and forget about them
No matter what type of account you choose to start your retirement savings, one important way to get started with retirement savings is to set up automatic contributions. When you only save money after all your other bills are paid, you often find yourself with nothing left at the end of the month. It’s a better idea to pay yourself first. Set up automatic contributions to your retirement account and then forget you did. Most people find that they don’t even notice the money that gets transferred out automatically, because they never actually see it.
Invest your “found” money
Our final suggestion to get started with retirement savings is a way to provide a little bit of an extra jolt. After you set up your automatic contributions, you might find that you occasionally come across a little bit of extra money that you weren’t expecting. This could be income from garage or online sales, an unexpected refund check, money from side hustles, or even money that you literally find on the ground. Instead of just taking that cash and depositing it into your regular bank account, jump start your retirement savings by contributing that “found” money right into your retirement account.