There’s no question that one of the most important parts of your journey toward financial solid ground is savings for your retirement. Gone are the days where most people had pensions or other sources of retirement income provided by their employers. Social security still exists but the future of that isn’t guaranteed. That means the main person responsible for providing retired you with enough money to live their dream retirement is current you. Since why you should save for retirement is pretty clear, let’s look at where and how to save for your retirement, along with why the best time to start is now.
Generally speaking, there are two different places you can save for retirement – through a retirement plan offered by your employer or through an Individual Retirement Account (IRA). Employers can offer a wide variety of retirement plans to their employees. Most of the plans offered today are considered Defined Contribution plans because you and your employer make defined contributions. On the other hand, plans that provide a defined benefit for you at retirement are called, you guessed it, defined benefit plans. These are mainly pension plans and aren’t as common today. The most common defined contribution plans are 401(k), Simple IRA, 403(b), 457, SEP IRA, among others. While the specific of each plan type vary, the basics stay the same. Both you and your employer can usually contribute to your retirement plan. With a few exceptions, retirement plans are invested in mutual funds (check out this link to learn more about mutual funds). Most plans are pre-tax (traditional) but there are some plans that offer Roth options (post-tax). The great thing about employer sponsored plans is that your employer usually matches a specified percent of your contribution. For example, they might match 100% of your contribution up to 3% or 100% of your contribution up to 3% and then 50% of your contribution up to 6%. If your place of work offers a retirement plan, chances are they match some of your contributions. It’s free money, so make sure you take advantage of it!
IRAs are the other way to save for your retirement. They are called Individual retirement accounts since you are the only one who can contribute to them. You can also either have a traditional IRA or a Roth IRA (check on this link to learn more about Traditional vs. Roth). All retirement plans, whether an employer sponsored plan or an IRA, have contribution limits set by the government to limit how much money can be put into a retirement plan each year. The contribution limits for 2020 can be found below.
So how much should you contribute to your retirement? Well, it’s different for everyone and should be based on your individual goals. Saving for retirement, like a lot of financial decisions, requires you to prioritize what matters most to you. In order to consistently and effectively save for retirement, you may have to give up some stuff in the present for the retirement of your dreams.
Interested in starting your journey toward financial solid ground? We’ll help you figure out where to start and support you along the way. Contact us to schedule an introductory meeting and to learn more!