When you envisage your ideal retirement, you usually don’t consider having to work during those years. However, for a large majority of Americans, this is a reality they must accept. According to a Pew Research Center study done in 2023, roughly one in every five Americans aged 65 and older, or 19%, are still employed.
This condition is caused by some circumstances, including a lack of funds or an underestimate of the expenses they will incur in retirement. While these challenges are true, there are practical steps you can take to lessen your chances of having to work in your senior years.
One of the most important steps you can take is to start saving for retirement as soon as possible. The impact of compound interest cannot be emphasized, which is why financial professionals consistently emphasize the benefits of early saves. The sooner you start, the longer your money has to grow. Even if you can only set aside a small amount today, those contributions will be more beneficial than those made later in retirement.
Imagine starting to save for retirement at the age of 25. If you invest $1,800 a year (equivalent to $150 per month) in a 401(k) with a 7% annual return, you could have just over $359,000 by the time you turn 65, providing you don’t increase your contributions.
On the other hand, if you wait to save until age 35 and contribute $300 per month (twice as much as in the first scenario), your savings will grow to nearly $340,000 by age 65, with the same yearly return.
How to Start Saving Money for Retirement
If you haven’t already, contact your workplace to set up 401(k) contributions. Once established, these contributions will be withdrawn automatically from your paychecks, resulting in consistent savings over time.
In addition to starting early, another effective technique for increasing your retirement savings is to take full advantage of any employment match available. An employer match is essentially free money, and donating enough each month to get it can dramatically increase your retirement savings.
For example, if your employer matches contributions of up to 3% of your yearly salary and you make $50,000, you might receive an additional $1,500 in retirement contributions each year. Over 40 years, assuming a 7% annual return, a single year of matching contributions might be worth somewhat more than $22,000.
To change your contribution amount, contact your retirement plan sponsor. It is also a good idea to review your contribution levels on an annual basis, especially if you have been with the same job for some years. Regularly raising your payments as your income improves can help you save more for retirement.
Open and Invest in a Roth IRA
Another efficient strategy to plan for retirement is to form and fund a Roth IRA (Individual Retirement Account). While investing in a retirement fund is a long-term commitment, it is critical to examine how taxes may affect your funds after retirement. The more taxes you owe in retirement, the less money you’ll have available, potentially forcing you to return to work to supplement your income. A Roth IRA can help to reduce this risk.
Unlike a 401(k) or regular IRA, Roth IRA contributions do not impact your current taxable income. However, the advantage is that withdrawals during retirement are tax-free. This is especially useful if you are at a higher tax rate, as it lowers your tax burden when you need it the most.
The contribution limits for IRAs apply to both Roth and regular accounts. As of 2024, the annual contribution cap is $7,000, or $8,000 if you are 50 or older. To start a Roth IRA, you must select a provider and apply for an account.
Once created, you can make recurring payments or choose larger, less frequent deposits, such as quarterly or annually. After financing the account, it is critical to invest the funds to ensure their growth over time.