Whether you're in the late career stage or just entering the workforce, saving for retirement is a top priority. A millennial's means to retirement funding may look different from a pre-retiree's approach, but the ultimate goal remains the same, and so do the rules: start now, and save often.
The Value of Time
With any retirement plan, time is as important as money. If you plan on ending your career at age 65, beginning to invest at age 25 allows investable assets to grow for four decades. However, individuals who start saving at age 50 shouldn't be discouraged. Allocating dollars now will build wealth to supplement Social Security payments or other retirement income.
Five Types of Retirement Savings Accounts
All future retirees do have one thing in common: the savings vehicles they use typically look alike. Learn more about five major types of retirement savings accounts below.
1. 401(k) Plans
These employer-sponsored plans allow you to make regular contributions from each paycheck. Money is placed in numerous investment accounts, and earnings grow tax deferred. Many companies provide matching funds. For every dollar you save, your employer contributes their share, capped off at a certain percentage of salary or wages.
2. Traditional Individual Retirement Accounts (IRA)
You can contribute a maximum of $5,500 to an IRA in 2018. Depending on your income level or active participation in a group-sponsored plan, contributions to a traditional IRA can be deducted from taxable income, and earnings also grow tax-deferred.
3. Roth IRAs
Roth IRAs have the same maximum contribution limits as their traditional counterparts. Tax treatment defines the difference between the two accounts. Roth contributions can't be deducted from taxable income, but earnings on the account are never taxed at withdrawal after age 59 1/2, as they are with a traditional IRA.
4. Health Savings Accounts (HSA)
Health savings accounts allow you to establish funds for out-of-pocket expenses associated with a high-deductible health plan. Contributions could be used to offset taxable income. Unused dollars are invested and can be withdrawn without penalty for non-medical purposes at age 65 or beyond.
Fixed or variable annuities are individual insurance products whose earnings also grow tax-deferred. Contributions can be made in installments or a lump sum but do not reduce taxable income.
First Steps: Your Emergency Fund
Before participating in any retirement plan, be sure to establish an emergency fund to manage unexpected expenses, such as medical bills or home repairs. Maintain 3-6 months of household income in a safe, liquid account that provides quick and easy access to your money.
Your age and risk tolerance will determine your investment strategy. Aggressive or younger investors often opt for stocks or growth-oriented mutual funds that can be held within a 401(k) or IRA. Older or more conservative investors generally choose less-volatile bonds or government securities that pose less risk to principal.
The Final Say on Saving for Retirement
Whatever your age or career phase, saving for retirement stands out as one of your most important goals. Start saving now to ensure that your lifestyle stays the same in retirement as it did during your career.