Saving early gets you the most out of the money you set aside for retirement. Because of compounding interest, the money you save now is worth more than money saved at a later time.
Saving for retirement is more important than ever. Pension plans are becoming rare. On average, Americans live 22 years longer than they did at the creation of Social Security in 1937.
Today's youngest members of the workforce will be responsible for most of their own retirement income. So, start saving.
Here's a quick overview of the most common investment accounts used to save for retirement:
IRA
If your employer doesn't offer a company retirement plan, start your own nest egg. Open an Individual Retirement Account (IRA).
These accounts provide tax advantages that a regular savings account does not.
The maximum contribution to an IRA is $5,500 per year if you're under age 50. The company or bank managing your IRA account will invest your money for you, so you receive interest.
It is easier to withdraw from an IRA than a 401(k). But, both have fees and penalties if you take money out before retirement.
401(k)
Your employers will direct this type of retirement account. You'll just chose how much is taken out of your paychecks, before taxes. This money is taxed when you withdrawal it. The current maximum annual contribution to a 401(k) plan is $18,000. Many employer plans include a matching contribution. Then, your employer will put money in your account on top of what you put in.
For example, say the company you work for has a program where they will match 50% of your contributions up to 3% of your paycheck. If you contribute the full 3%, you'll receive an extra 1.5% from your employer. That's free money for your retirement!
Roth vs Traditional
There are two types of both IRAs and 401(k) plans, Roth and Traditional. The basic difference is when you have to pay the taxes on the account.
With a traditional retirement account, you pay the taxes once you're retired or taking money out of the account. With a Roth account, you pay the taxes upfront when the money is put into the account.
Roth accounts are especially valuable to young workers. You'll most likely climb into higher tax brackets as you get older. So, you'll owe more in taxes on the same amount of money later in life.Notice that keeping cash under your mattress isn't on this list. Money that isn't invested or placed in a bank account earns no returns or interest. And, because of inflation it will likely lose value over time.
Make your hard-earned money work for you. Invest in an IRA or 401(k). At the least, deposit it into an interest-earning savings account.
If you have questions about how to get started saving for your retirement, ask your employer's Human Resources personnel or talk to your local banker.
Peoples State Bank, Member FDIC
