No one wants to work forever. But, if you don’t start saving for retirement now, you may have no other option.
Statistics show that four out of five Americans have less than one year’s salary saved for retirement. This may also be why 77% of Americans are not on track to have enough for retirement!
One of the main reasons why people aren’t saving for retirement is because they don’t understand all the different retirement lingo and options. Instead of staying in the dark and hoping you’ll have enough money down the road, take the time to learn more about retirement now.
Keep reading to discover the best ways to save for retirement.
1. Employer-Sponsored Plans
According to the Center for Retirement Research, a person’s employer-sponsored plan typically represents the majority of their retirement savings.
These are savings plans that a business offers its employees at little to no cost. Each employee can decide whether to contribute a certain percentage of their income towards retirement. All of this is done “pre-tax,” meaning the money you contribute to the plan is not taxed and therefore less of your overall income is taxed.
You should always contribute to your employer-sponsored plan first, especially if your employer offers a match up to a certain percentage. This is essentially “free money” added to your retirement savings.
These plans are specifically referred to as 401(k)s and 403(b)s. A 401(k) is offered by a private company while a 403(b) is offered by a non-profit company or government entity.
2. Traditional IRA
Another common type of retirement savings account is the Individual Retirement Account. There are two main types of these: Traditional IRA and Roth IRA.
A Traditional IRA is a retirement savings account that comes with additional tax benefits. The amount that you contribute to your Traditional IRA is deducted from your annual taxable income. For example, if you earn $50,000 for the year but contribute $5,000 to your Traditional IRA, your taxable income is only $45,000.
There are limits to how much you can contribute to your traditional IRA each year. In 2020, individuals 49 or younger can contribute up to $6,000 for the year. This means you can save up to $500 a month towards your retirement for this specific account.
You are eligible to contribute to a Traditional IRA even if you already contributed to an employer-sponsored plan.
3. Roth IRA
Another way to reach your retirement goals is by contributing to a Roth IRA.
Roth IRAs are very similar to Traditional IRAs, except when it comes to taxes. With a Roth IRA, your investments are taxed when you contribute them to the account. But, the money is no longer taxed when you withdraw it upon retirement. So the difference between the two accounts is simply when you are paying the taxes on the money.
Many people believe that a Roth IRA is a better investment choice because it’s commonly believed that taxes will continue to increase as time goes on. By choosing to pay the current tax rate instead of the future tax rate, you are potentially saving money.
4. Tax-Deferred Annuities
Retirement investment planning experts believe a tax deferred annuity is extremely valuable when it comes to any retirement portfolio.
These are annuity contracts that delay the payments until a certain time. There are two main phases to these accounts: the saving phase and the income phase. During the savings phase, you contribute to the account monthly. But during the income phase, you receive a monthly payment.
These are tax advantaged accounts because many of them allow the investment to remain tax-free until you withdraw the money. So, while the money remains in the account, it is able to generate the maximum compound interest without contributing to taxes, therefore increasing the total account value.
5. Asset Investments
There are other ways you can save for retirement by building up your asset investments throughout your life.
In addition to retirement savings accounts, many people have high-yield savings accounts. These traditional savings accounts aren’t earmarked for retirement years only, so they can be used at any point in life. If you like the idea of being able to to use your funds sooner than retirement age if an emergency arises, you can invest in a traditional savings account.
If you want your money to work for you instead of just sitting in an account, consider other methods of building your assets through investments. Some of the more common investments are through stocks, real estate, or small businesses.
By investing your funds into these areas, they have the potential to grow in value and earn you more money over time. Once you are ready to retire, you can cash out your initial investments and receive the current value of the asset.
But, these investments could also lose you money, which is why you should invest in assets after you’ve already contributed to a more traditional retirement savings plan.
Take Advantage of These Ways to Save for Retirement
The key to retiring financially secure is to use as many different ways to save for retirement as possible.
Always start with your employer-sponsored plans as these often offer free matches, then move on to the IRA of your choice. From there, you can work on investing in tax-deferred annuities and any extra resources can go towards asset investments. Having a diversified retirement portfolio can help guarantee you and your spouse live comfortably after leaving the workforce.
Looking for more ways to live your best retired life? Check out this article to discover the best credit cards for seniors and retirees.