One of the greatest monetary difficulties you'll confront is putting something aside for retirement. There are different ways of thinking on how much cash you'll have to live serenely during retirement. Regardless that figure is, it's fundamental to be proactive with regards to saving assuming you need to arrive at your retirement objectives.
How to save for retirement:
Aim to save at least 10% to 15% of your pretax income
That’s what most experts recommend, and it’s a good starting point for your own calculations. Aim to replace 70% of your annual pre-retirement income, which is a standard formula for calculating retirement needs. Why only 70%? Because some expenses will be lower, like commuting costs. And remember, you’ll no longer be saving 10% to 15% of your income for retirement. Do not include any expected Social Security benefits, or any other sources of income, like a pension, rental income or part-time work.
Get your free money. We covered this in Chapter 1, but we’ll hammer it again: If your company offers an employer-sponsored retirement plan, like a 401(k), and matches any portion of the money you contribute, direct your first savings dollars into that account, at least until you receive the full match. If your plan doesn’t offer matching contributions, or you don’t have a workplace retirement plan, start with the next step.
Contribute to an IRA. We’ll help you figure out which type of IRA is better for you — a Roth or traditional — in a moment. The annual IRA contribution limit is $6,000 in 2021 and 2022 ($7,000 if age 50 or older).
If you max out the IRA, turn back to your 401(k) or other employer plan and continue making contributions there.
Traditional IRA VS Roth IRA:
There are other types of IRAs, but the two biggies are the Roth and traditional IRA. The main difference between them is how taxes work:
Traditional IRA: The money you contribute may be deductible from your taxes for the year, meaning you fund the account with pretax dollars. You’ll pay income taxes on money you withdraw from the account in retirement.
Roth IRA: Contributions are not deductible — the account is funded with post-tax dollars. That means you get no upfront tax break as you do with the traditional IRA. The payoff comes later: Withdrawals in retirement are not taxed at all.
The best way to save for retirement is in a retirement savings account.. There are lots of different types of investment accounts, but retirement accounts like IRAs and 401(k)s were created specifically to give people incentives to save for retirement.
Written by Anna Li