Retirement seems like a long time away for Gen Y, but it’s never too early to start saving. In fact, time is on your side right now and investing money in a retirement account will allow that money to grow at a much faster rate than it would if you kept it in a savings account.
Why is saving for retirement so important? Let’s look at Baby Boomers as an example, since they’re at or approaching retirement age. A recent survey found that Boomers have savings goals that would allow them to live on $45,500 per year during their retirement. But in reality, they’re coming up short on those goals — by $37,000 a year!
This is a serious issue that will leave many Boomers in a tough financial situation at an age where they’re no longer earning an income to make up for it.
The longer you wait to begin building your retirement nest egg, the harder it will be to accumulate enough money to support you through what could be 20 to 30 years of retirement. And saving the bare minimum won’t get you there. Plan to save more in order to ensure your golden years will be financially secure.
The Road to Retirement Savings
If you haven’t begun saving for retirement, or you have started but are barely setting any money aside, here’s a primer on the types of accounts you should set up and how much to save.
First, take advantage of an employer-sponsored 401(k), where your company will match your contributions if you put in a certain percentage of your salary. Don’t pass up this chance for free money! The money you contribute is automatically transferred over from your paycheck pre-tax, so you’re getting the dual benefit of saving money before paying taxes on it and paying a lower amount of income tax on the money that’s left.
Second, open a Roth IRA and try to fully fund it each year. This money is contributed to the account after paying income tax on it, allowing you to eventually make withdrawals without paying additional taxes. The maximum annual contribution for 2017 is $5,500 if you’re under 50. This sum doesn’t need to be deposited all at once. Make monthly or quarterly contributions.
Third, aim to save even more if you’re already putting money into your 401(k) to get the company match, maxing out your Roth IRA, and still have cash available each month after paying necessary expenses. You can start by contributing a greater amount to your 401(k). Aim for 10% or even 15% of your annual salary. (The maximum you can contribute each year is $18,000.)
Don’t Touch That Money!
A 401(k) or IRA isn’t like a typical savings or investing account. If you withdraw money from it before you reach the age of 591/2, you’ll pay a 10% penalty. This is money you’re going to want to leave untouched for awhile.
There are a few exceptions to this rule. For both Roth IRAs and 401(k)s, you can withdraw money to help support yourself in the event you’re disabled and can no longer work. If someone dies before the age where they can withdraw without penalty, the money will be distributed to their beneficiaries or estate.
For 401(k)s, there some allowances made for people who leave a company when they reach 55 years old. Workers in certain fields (police officers, firefighters, or medics) can tap into their 401(k) beginning at age 50.
Your Roth IRA offers even more flexibility when it comes to early withdrawals if you’ve had the account for at least five years. You can take out up to $10,000 to buy, build, or rebuild your first home. You can use that money to pay for college expenses for you, your spouse, children, or grandchildren.
But again, your goal should be to leave money in your retirement accounts and avoid any early withdrawals. Funds like emergency savings should cover you in times of crisis and you can set separate savings goals for big purchases like a new home. And make sure you’re properly insured, so your income is protected if you can’t work and you have less of a need to tap into your retirement accounts.
Don’t Shortchange Your Future
A lot of Millennials are struggling to pay the bills, especially if they have student debt, so saving for retirement gets put on the back burner. But life is only going to get more expensive as you get older, and savings habits are hard to build later in life.
The time to get into the habit of automatically putting money into your retirement accounts is right now. Even if you can’t save much, save something. You’ll thank yourself when you retire!
If you’re interested in learning more about all the different ways to save for retirement, sign up for my online course, Smart & Easy Retirement Planning for Millennials!