Most people eventually want to retire someday, but planning for retirement is not a passive process. You need to actively make sure you’re setting aside the right amounts to secure your financial future.
When preparing for retirement, identifying your savings goal is the most important step. Despite this, only 40% of Americans have actually calculated how much they’ll need, according to the U.S. Department of Labor.
Without knowing this figure, you run the risk of burning through your entire savings during retirement. Fortunately, there are online tools available to determine how much you’ll need based on your starting amount and other factors.
If you’re having trouble coming up with a figure you feel comfortable with, it’s best to speak to a retirement planning professional. They can design a retirement plan based on your age, income, and lifestyle.
2. Automate your savings efforts
Despite your best intentions, it can be difficult to hit your savings goals every month. This takes a lot of self-discipline, even if you have a healthy salary. That’s where automation can help.
Most retirement accounts have an option for automatic investing. With this option, you can set specific amounts that will be transferred from your checking account into your retirement account every week or month. This is the best way to eliminate any temptation to spend money that should be going toward retirement.
3. Max out your employer-sponsored plan
If your employer provides a 401(k) matching plan, then you should take full advantage of it. These plans allow you to make contributions that are matched by the employer, typically up to a portion of your total salary.
This is essentially free money, so make sure you’re maxing out your contributions every year. Here’s another important benefit of maxing out 401(k) contributions: you’ll get a major tax break. You can defer taxes on up to $19,500 of your income annually (although the exact amount may change by year).
4. Open up an Individual Retirement Account (IRA)
If you don’t have an employer-sponsored retirement plan, then you should open up an IRA. To accelerate your savings goals, you can contribute to both plans (if you have the option).
Like most retirement accounts, an IRA offers major tax benefits. With a traditional IRA, your contributions immediately reduce your taxable income for the year. During retirement, your withdrawals are then taxed as regular income.
A Roth IRA is essentially the opposite. Your contributions are made with after-tax dollars and are not deductible. The major benefit of a Roth IRA is that withdrawals made during retirement are not taxed.
5. Don’t touch your retirement savings
This is one of the most important pieces of advice to help you prepare for retirement. Avoid touching your retirement savings at all costs, no matter how tempting it may be. There are several reasons why dipping into your retirement money early is detrimental.
First, you may face hefty penalties. You’ll also lose principal and interest, and you may no longer qualify for certain tax benefits. Lastly, you’ll have to work even harder to replace the savings you lost.
Need help preparing for retirement? Meet with an expert in Lenexa, KS
OWLFI is a retirement planning firm that works with clients from all walks of life and income levels. Their experts can help you prepare for retirement with a customized plan based on your age and savings goals.