What You Should Know about Saving for Retirement
For most people, the end goal of a long life of working hard to contribute to society is to eventually be rewarded by not having to work any longer, also known as retirement.
Despite being a long-term goal to relax and do the things we always wanted to do when we had more time and financial freedom, retirement is a notion that terrifies many people today, because they don’t believe that they will be able to have it.
For many Americans, the dream of retirement, which should be a requisite of the American Dream, is quickly fading away, due to stagnant incomes and a disparity in how much people make for companies they work for. However, it doesn’t have to be this way.
The prime misconception that makes people believe that they can’t retire when they become a senior citizen is that they think that they have to physically save all of the money that they will need.
Top 10 Ways To Prepare For Retirement
However, the trick is to make the money you already have work for you while you are saving it, so that it continues to grow. Here are some things that everyone should know about saving for retirement…
401(k)
The one tool for retirement investing that everybody has, even if they don’t fully understand it, is a 401(k). The reason that everybody has a 401(k), or at least everyone who has ever held a full-time job, is because your employers sponsor this plan for you while you work for them.
A portion of your paycheck is put away into your 401(k), and then that portion is matched by your employer, at least up to a certain percentage.
401(k)s are incredibly useful for getting the most out of your money, as they are not subject to income tax until you start to withdraw from the fund. This means that you could end up paying less taxes, if you are in a lower tax bracket because you stopped working.
On top of that, there’s a significant portion of money in your 401(k) that was sponsored from your employers, so you didn’t have to front the whole amount.
Roth IRA (link)
The major alternative to doing a 401(k) is by opening an Individual Retirement Account, also known as an IRA. This is a retirement plan that holds funds that you put away until you are 59.
The most popular form of an IRA is a Roth IRA, but there are still people who set up traditional IRAs for specific reasons (there are different tax purposes for both). The primary benefit of doing an IRA over a 401(k) is that you have a lot more input on how that money is invested, which is prime purpose of putting it into a special account.
Ideally, you want your money to be making at least 7%, per year. If you are able to hit this number, at a minimum, then the compound interest will eventually cause your funds to exponentially climb. To learn more about the advantages between a Roth IRA and 401(k), check out this helpful blog post here…
Social Security
Another important aspect to consider about preparing for retirement is that you will finally be able to cash in on a check that you have been writing for your entire working life: Social Security.
The Social Security tax is actually not necessarily a straight up tax, nor is it a form of traditional general welfare spending. Rather, Social Security is a program that functions as a government sponsored retirement fund for all citizens. Rather than be given money by the government, they put a certain amount away from every paycheck, and it is paid back out to you after you reach a certain age.
This means that the benefits that you get from Social Security are proportional to the amount that you paid into the program.
Investment portfolio
As a general rule, by the time you retire, your investment portfolio should reach about $1.5 million (although this number is incredibly dependent on your lifestyle). The reason for this is that you should be sticking to a withdrawal limit of 4%, annually, from your portfolio. This equals about $60,000 every year.
However, your portfolio will not be shrinking, as it should still be growing by about 7%, which means it will continue to climb, year after year.
Category: Financial Planning, Retirement
