If you’re in your 20s and have just entered the workforce with a full-time job, you may be considering when and how to start saving for retirement. Don’t be tempted to put it off – it’s never too early to start this process. There are many reasons why you should start contributing to your retirement early on in your career and many ways to go about it.
First, if your employer offers a 401(k) plan, you can use that to start saving for retirement. A 401(k) allows you to invest a portion of your paycheck into your retirement account.
Adding cash to your 401(k) is one of the best ways to save for retirement because the money is taken out of your paycheck before your income is taxed, which means you’ll be paying less in taxes, saving you money. According to Visa’s Practical Money Skills program, your account will grow faster the sooner you start saving for retirement.
By setting up automatic contributions to your 401(k), your money is withheld from your paycheck, so you don’t have to worry about putting money into your retirement savings manually every time you get paid.
For example, according to U.S. News & World Report, “Contributing just $50 per twice monthly paycheck will leave you with over $1,200 within a year. If you kept up that savings rate for 30 years and earned 6% annual returns, you would have nearly $100,000.”
Contribution Match Opportunities
Many employers offer a 401(k) match, although some will require you to contribute a certain proportion of your salary in order to qualify. Employer matches are a great return on investment, so do your best to qualify for the match. According to Emily Brandon, staff writer at U.S. News & World Report, “Employer contributions are one of the best ways to grow your retirement savings quickly.”
Get an IRA or a Roth IRA
If your employer doesn’t offer a 401(k) plan, consider saving for retirement in an individual retirement account (IRA). An IRA operates in a manner similar to a 401(k). U.S. News & World Report says that IRAs allow anyone with an earned income to defer paying income tax on money they deposit into the account.
In addition to traditional IRAs, there are also Roth IRAs, which are particularly good for young people in the workforce who are in a low tax bracket. According to Merrill Edge, Roth IRAs “are different from traditional IRAs in that contributions are made with after-tax money and aren’t deductible – but qualified withdrawals are tax-free in retirement.”
Being in a lower tax bracket reduces the possible value of the tax deduction that you’d get with a traditional IRA, so a Roth IRA may be the better bet for some people.
Get Advice from an Expert
Do you feel like you need more help with your retirement plan? If your employer works with a retirement plan provider, don’t be afraid to ask for advice on your financial decisions to make sure you’re aware of all your investment options. You might also want to check in at least once a year so you know you’re on the right track for a healthy retirement!
Avoid Borrowing from Retirement Savings
As tempting as it may be, avoid pulling money from your retirement savings. Even though your retirement may be a long way off, it’s not smart to take funds out for a new car or home because you won’t be earning interest on the money you take out anymore.
Try your best to leave your retirement savings alone – you’ll be grateful you did later.
You Might Qualify for the Saver’s Credit
If you start saving for retirement now and your yearly income is relatively low, you could qualify for the Retirement Savings Contributions Credit. The Saver’s Credit, as it’s also known, gives a unique tax break to low-income taxpayers who are saving for retirement. However, many people who qualify don’t even know about it.
According to TurboTax, “a recent survey shows that only 12% of American workers with annual household incomes of less than $50,000 are aware of the Savers Credit.”
So be sure to see if you qualify for the credit so you can cut your tax bill!
Have an Emergency Fund
The unexpected, such as accidents and medical emergencies, happens every now and then, so create an emergency fund that you can use for these expenses. This is a crucial step to ensure you don’t have to resort to pulling money from your retirement savings when a crisis strikes.
To get the most out of your retirement, start saving now! Having a new job is exciting, but it’s essential to manage your finances so that you can retire comfortably.
Do you have any advice on how to save for retirement? Share in the comments below!
If so, subscribe now for tips on home, money, and life delivered straight to your inbox.