What Is the Best Way to Save for Retirement?

Mar 18, 2020

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Saving for retirement is a long-term plan that you should get started with as soon as possible if you haven't already. There are many ways to save for retirement, but some are more effective than others in helping people achieve their goal of financial stability. Let's look at some of the best ways to save for retirement.

Contribute to Your 401(k) Plan

Many employers offer a company-sponsored retirement plan.  The most common type is the 401(k). With this type of account, you can contribute a portion of before-tax income to the fund. Since this contribution is made before taxes, you have the benefit of being able to stretch more dollars toward that fund. Contributing also helps reduce the taxable income that you earn throughout the year. Keep in mind that once you start taking withdrawals, you will be taxed on the money.

Some employers will also match your contribution up to a certain percentage for each month. If your employer offers this benefit, you should consider contributing a minimum of the percentage that they match. For example, if you have an employer that provides a 6% 401(k) match, you should consider contributing 6% or more to maximize your investment potential.

401(k) plans don't take much effort on your part to start saving. You can choose the type that you want to contribute to, then select the percentage to be taken out of your paycheck. That amount will automatically be taken out of your paycheck and distributed to the fund you've chosen.

Most employers have a vesting period. Make sure that you understand what the time-frame is upfront. If you do leave your job, you will want to consider rolling that money over to an IRA so you can have more control.

Start a Roth IRA or Traditional IRA

These two types of IRAs are the most common. The difference between the two revolves around how taxes work. Roth IRAs are contributions that you make with after-tax dollars. You don't get the benefit of an upfront tax break, but your withdrawals will be tax-free.

Traditional IRAs take contributions that are pre-tax, similar to how a 401(k) works. You will reduce the amount of income that you will be taxed on when you file your taxes. When you start making withdrawals, you will have to start paying taxes on those funds.

You can contribute to both types of funds as long as you limit your total contribution to the annual limit. Or you can choose to contribute the total yearly limit to one fund. If the taxes that you pay are currently low, and you expect your taxes to be higher in retirement, you should choose a Roth IRA. But if you believe that your taxes will be lower in retirement and you want to benefit from lowering your taxable income now, a traditional IRA could be right for you.

How Much You Should Save for Retirement

The amount that you will need to save for retirement can seem like a difficult question to answer. Most experts recommend that you should save at least 10% to 15% of your pre-tax income for retirement. If you are starting to save later in life, that amount might need to be adjusted.

There are many retirement calculators out there that can help you determine what you need to save. You can enter information such as your current age, income, savings goal, and when you plan to retire. Your retirement goal should not consider other sources of income, such as social security, rental income, or a part-time job. Keep in mind that your expenses will generally be lower in retirement. For example, you won't be driving to work every day when you retire.

Ways to Maximize Saving for Retirement

A couple of small changes can result in generating a more significant retirement fund. If you get a raise at work, consider boosting your retirement investment with that extra money. You can still enjoy a bigger paycheck from the raise, while "quietly" adding more money to your retirement fund.

Try to cut down or reduce your expenses. For example, cut your cable TV service if you rarely watch or have several streaming services. Packing your lunch to work versus eating out every day can result in a noticeable saving that can be redirected to your retirement fund.

Avoid paying penalties such as early withdrawal fees for starting to take money out of your retirement account before you reach the minimum age. Your retirement funds should be used for the purpose they were intended.

If you have more questions on how to save for retirement, talk to one of the experts at NASB at 800-677-6272.