The Best Ways to Save for Retirement
How to Make Sure You're Prepared
If you retired today, would you have enough money saved to support yourself? Forget Social Security; it’ll likely be gone soon enough – maybe even by the time it’s your turn to enter the golden years. With that thrown out, do you have enough money?
With everyone living longer, that doesn’t mean supporting yourself for the next 10 years – it means having enough money for 20 or 30 years. Don’t forget medical costs. The older you get, the more doctors’ visits, hospital visits, and medications you’ll have to pay for, even if you have insurance.
If you want to live out your retirement successfully, it’s important to start saving now, no matter if you’re 30, 40, 50, or 60. The sooner you start, the better.
Before you start planning, keep a few things in mind:
Ten percent return isn’t realistic anymore. With interest rates so low, you’re looking at 5% or 6% these days, according to MarketWatch.
With lower interest rates, your money doubles later. So when rates were 10%, it took seven years to see twice as much money as you put in. With 6%, you’ll see that amount in 12 years.
Stay away from mutual funds – they cost as much as 1.27% a year, and over 30 years, you’ll end up losing a third of your retirement.
Diversification increases the chances you’ll gain more than you’ll lose in retirement savings.
With these points out of the way, here are your options for saving for retirement.
1. Tax Advantaged Savings Plans
Start looking at 401(k), 403(b), and 457 plans. You can contribute as much as $17,500 if you’re under 50 years of age. Those 50 or older can contribute $5,500 more, so $23,000 in total.
If you’re self-employed, there’s a special kind of 401(k), which is a profit-sharing plan. If you make $75,000 net profit, you can contribute $31,000. If you’re 50 or older, you can boost that contribution to $36,500. If you make $180,000 or more in a year, you can contribute as much as $56,500 if you’re 50 or older.
2. Traditional, Roth, and Simple IRAs
You can contribute $5,500 to an IRA if you’re under 50 years old. If you’re 50 or older, you can contribute $1,000 more for a total of $6,500.
Deciding between traditional and Roth IRAs takes some research. Most importantly, traditional IRAs provide an annual tax break but are not taxed until withdrawal. This could mean a healthy payout when you reach retirement age. Roth IRAs are not taxed at withdrawal, but you don’t receive a tax break.
Some self-employed individuals choose simple IRAs. There’s a contribution limit of $12,000 for those 50 years old and younger and a limit of $14,500 for those 50 and older.
3. Exchange-Traded Fund (ETF)
ETFs are securities that track an index, but they are traded like stocks on an exchange. They do not have a net asset value calculated daily. This is the advantage over mutual funds, in addition to the lower expense ratios. The other benefit of an ETF is that you get index fund diversification. You can also buy on margin, sell short, and purchase just one share.
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Tips for Saving for Retirement
To take advantage of a savings plan, you’ll need to put money in. To put money in, you’ll have to save it. Here’s how to do that.
1. Save as Much as You Can
Every month, save as much money as possible. Even if it’s a small amount, it’s better than nothing.
2. Keep the Goal in Mind
You want to retire well, so you’ll need to keep that in mind when you want to buy that new boat, car, or other luxury item.
3. Budget to Save
Budgeting can do wonders for people who never seem to know where their money goes every month. If you look at your income and expenses, you’ll likely see where you can cut back to save more than you do now.
4. Pay Attention to Investments
It’s not a good idea to invest and forget. Keep an eye on them, and adjust accordingly.
5. Research, Learn, and Take Action
Markets, investments, and financial options change over time. Continue researching, learning, and decide what is best for you. While you will hear and read many opinions about retirement savings, you’re entitled to your own views. Everyone’s situation is different, which means one plan may not be profitable for all people.
It’s time to start thinking about retirement. Why not today? The sooner you do it, the better you’ll be financially later in life.
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