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Financial Wellness

How to Save for Retirement at Any Age

When you talk to people about how to save for retirement, you’ll likely hear one of three things… I’m too young to worry about retirement. I’m too old to start. I’m already saving.

Aside from the final reply (well done!), such thoughts are incorrect but sadly all too common. People just starting on their employment journey, with an employee’s 401(k) plan and company match available to them, often don’t consider their financial situation in 30–40 years time. When you’re young, though, your money has more time to grow, making those years the very best to save! Meanwhile, older folks who have not been saving or not saving enough for retirement tend to believe that they’ve missed their opportunity to build a nest egg. 

The truth is that it’s never too early to start saving for your retirement and never too late to catch up and secure your financial future.

Important Facts About Retirement Income

  • Americans are living longer than ever before. While good news, this likely means you’ll need to have more saved to generate enough retirement income, and for a longer period of time, than you may currently imagine in order to maintain your quality of life once you stop working. 
  • While once a reliable source of retirement income, Social Security benefits alone will probably not be enough to ensure a comfortable retirement. For this, you’ll need a supplemental source of income.
  • You shouldn’t count on Medicare to fully cover the costs of assisted living or a nursing home, should you need those services later in life.
  • According to 2020 research by Investopedia, almost half of all Americans have no retirement savings whatsoever. This means that, sadly, half of the population may never be able to stop working. 

These facts make it imperative you know how to save for retirement and start saving as soon as possible, no matter your age, so that you can enjoy your later years.

Types of Retirement Accounts

Before we talk about how to save for retirement, let’s take a look at the two most commons types of accounts with which you can put money aside now to let grow. 

Employer-Sponsored Plans

The two most common employer-sponsored plans are 401(k) and 403(b). The former is offered through for-profit companies while the latter is associated with universities, hospitals and other non-profits. With each, employees have the opportunity to save a percentage of their pre-tax paycheck, which not only grows tax deferred via contributing to a 401(k) or 403(b) pre-tax, but also reduces your taxable income. This means that while you may see a $25 contribution deposited into your 401(k) on payday, for example, less than $25 will be ‘missing’ from your take-home pay because you’ve paid less in taxes. 

Many employers offer a matching contribution (or matching up to a certain percentage) to encourage participation in their retirement plan and help accelerate savings growth. Most people should not only be enrolled in their company’s 401(k) but take full advantage of any available match. And the earlier you start, the more money you’ll have saved for retirement.

In 2021, the maximum amount you can contribute to your 401(k) plan in dollar terms is $19,500. But don’t let this figure scare you away from starting. Any portion of your paycheck that you can direct to your retirement will benefit you later in life. 

According to a 2020 TDAmeritrade Report, company 401(k) plans are the preferred investment vehicle for workers between the ages of 40 and 60. 

*There are also solo 401(k) plans available to self-employed individuals. These plans are designed to help business owners save both as the employee and employer.

Individual Retirement Accounts (IRAs)

IRAs are tax-advantaged accounts that you open on your own, not through an employer. Typically, you’ll save money for retirement in an IRA through investment firms (the money invested in a combination of stocks, bonds and mutual funds of your choosing) or a bank (the money saved in a certificate of deposit or similar interest-bearing bank product).  

There are two main types of IRAs: traditional and Roth. The biggest difference between the two is when you pay taxes.

With traditional IRAs, the amount you contribute is tax deductible. Only when you start withdrawing money during retirement is the original money plus any earnings taxed as ordinary income.

The opposite is true with Roth IRAs. Your money is contributed ‘after tax,’ meaning there’s no tax deduction or tax benefit today. But, qualified withdrawals of the original money you contributed plus any earnings are tax-free when withdrawn after age 59½ and when it’s been at least five years since you first contributed to the Roth. Additionally, you always have access to your original Roth IRA contributions, with withdraws available for any reason, and at any time, with no taxes or penalties.

For the 2021 tax year, you’re able to contribute up to $6,000 to an IRA if age 49 or under — slightly more if you’re over the age of 50. Read on to discover this benefit of saving for retirement later in life.

How to Save for Retirement at Any Age

The best way to learn how to save for retirement is to start now, regardless of your age. Through a company’s 401(k) or 403(b)(7) plan, you can begin with just one or two percent of your pre-tax salary and set an automatic increase every year. Although, if you’re able, you should contribute enough to get the full employer match (if offered) right away.

The Benefits of Starting Young

Compounding interest and earnings — the concept of your earnings generating additional money, and those new earnings generating even more, and so on — make the first dollars saved possibly the most profitable because that money has longer to grow and multiply. These early retirement contributions will likely have the biggest impact on your ability to comfortably retire. 

To put this in real terms, a 25-year-old who invests $75 per month could accumulate upward of $113,000 more in retirement savings by age 65 than if he or she started investing $100 per month at age 35 — despite investing less each period, according to Merrill Edge. That’s the power of starting early and watching those dollars compound over those extra years. And this growth on top of growth can help you hit your retirement savings goals more easily.

Here’s how much Fidelity Investments says you should have saved for retirement at every age, in order to maintain your current quality of life into your retirement years:

  • By age 30: The equivalent of your annual salary (For example, if you make $55,000 a year, you should have $55,000 saved by your 30th birthday.)
  • By age 40: Three times your income
  • By age 50: Six times your income
  • By age 60: Eight times your income
  • By age 67: 10 times your income

Despite this, 28% of people in their 60s have less than $50,000 saved for retirement, meaning over a quarter of older Americans likely won’t get to slow down and enjoy what should be their retirement years. 

The Benefits of Saving Later In Life

Current laws governing employer-sponsored retirement plans allow you to contribute an extra $6,500 each year to your 401(k) or 403(b) plan if you’re age 50 or older. With these catch-up contributions, the individual limit increases to a maximum of $26,000. If you can afford it, taking advantage of these higher limits will allow you to boost your savings.

Those age 50 and older are also permitted to contribute extra money to IRAs each year, with the limit increasing to $7,000 for 2020 and 2021. You’re also able to contribute to an IRA for the previous tax year up until the current year’s tax filing deadline date to get another deduction before filing, if needed. Keep in mind that for specific questions or concerns about filing taxes and available deductions, it’s best to consult a trusted tax professional.

No matter when you begin your retirement savings journey, it’s critical that you do so. Maybe you can consider adding another new year’s resolution to start (or start saving more) for your retirement. Making the accumulation of tax-deferred or tax-advantaged money for retirement a priority throughout your life will help ensure you’re able to enjoy your later years and that you’ll be taken care.

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