Retirement Savings and Investing: How to Save for Retirement

My dad is in his early 60s, so he is just a few short years away from retirement. On the other hand, I am in my mid-20s, so I still have another 40 years of work in front of me. Since I have so much time, I don’t need to save for retirement now, right?

Wrong. This is a mistake many are making. According to Gallup, around 60% of Americans have money invested for their retirement. This means 40% of Americans aren’t saving for their retirement. Benefits from Social Security won’t be enough to pay for a sustainable life in our later years. Here is how you can be part of the 60% statistic and start saving and investing for your retirement.

Retirement Investing Options

Investing is the mainstream method to grow your savings over time. The amount of money you invest and what accounts you choose to invest in is up to you. It depends on your savings goals and tax implications.

Here are the different types of investment accounts.

Stocks and Bonds

When you buy an individual stock, you buy a small portion of ownership of the business. When the business does well, the value of your investment increases. But when the business does poorly, the value of your investment decreases. When you hear people talk about the stock market, this is what they are talking about.

With a bond, you loan money to an entity in exchange for your money back with interest. Bonds are generally less volatile than stocks, though their value can still fluctuate based on interest rates and market conditions.

IRAs

An IRA, or Individual Retirement Account, is a retirement account with varying investments. It can consist of stocks, bonds, annuities, certificates of deposits (CDs), mutual funds, and other types of investments. The money you invest in a traditional IRA is pre-tax, so you won’t pay tax on the funds until you withdraw them from your account. On the other hand, the money you invest in a Roth IRA is already taxed, so you won’t pay additional taxes when you withdraw. Alltru also offers a Coverdell Education IRA so you can save money for your child’s education tax free.

Mutual Funds

Mutual funds are investment portfolios made up of money from many investors. These funds can include stocks, bonds, and other types of investments. When you invest in a mutual fund, you purchase shares in the overall portfolio, and those shares may earn dividends over time. Many beginners have a professional manages the funds.

401(k)s and 403(b)s

Many employers offer 401(k) and 403(b) retirement savings plans for their employees. With these plans, employees can contribute directly from their paychecks. Some employers even offer a match to help boost your savings.

The Cost of Investing

With any type of investment, there will be risk of loss. This is why many choose to diversify their investments. Many investors diversify across multiple retirement accounts and investment types to help manage risk and pursue long-term growth.

Planning for Retirement in Your Early Career

By planning early in your career for your retirement, you give yourself more time to gradually save money. That money also has more time to grow before you need it. Here are the steps to start planning for your retirement while you’re in your 20s and 30s.

Start Investing

The easiest way to start investing is to join your employer’s retirement plan, like a 401(k). If your employer doesn’t offer a retirement savings plan, you can open a variety of IRAs at Alltru.

Create a Budget

Creating a budget alone won’t necessarily help you save for retirement. However, you can add money for your retirement savings into your monthly budget so you make sure to invest every month even if your employer doesn’t have a plan. You can even set up automatic transfers so you don’t forget to save every month.

By following a budget, you can create a maintainable lifestyle for now that you can stick to during your retirement. Social Security benefits may help cover a portion of your retirement expenses.

Take the Free Money

If your employer offers a match to your 401(k) contribution, take advantage of the offer. A 401(k) match typically requires you to invest a percentage of your paycheck up to a certain amount for them to do the same. Some employers offer an exact match up to a 5%, while others offer to match half of your investment up to 8%.

Count the Cost of a New Job

When you leave a job, you can’t take the 401(k) plan with you, but you can take the money. Some choose to cash out the money instead of rolling it into the new employer’s plan. Doing this will cause you to pay an early withdrawal tax.

If an employer offers a match, they’ll require you to work for the company for a predetermined time period to allow you to keep all the funds if you were to leave. This is called having your money vested. For example, if you find a new job after working with your current employer for two years, they may only let you keep 50% of their match. Every employer is different, so check with your human resources team to learn the details of your plan.

Use Your Resources

It’s normal to feel confused about investing. Your paycheck can take a big hit if you choose to invest in your retirement while paying off debt and planning for other goals. If you need help reviewing your personal finances, meet with an Alltru representative so we can create a plan that meets your goals.

Get Caught Up

If you feel behind on saving for retirement, don’t panic. The sooner you take action, the more time your savings have to grow and the easier it may be to get back on track. With so many retirement savings options available, it’s important to start with a few simple steps and build from there.

The first step should be setting up a retirement plan with your employer and contribute enough to get the full match. After that, create a budget to allow additional room for saving. This is a great time to meet with a representative at Alltru to help you decide what type of account to open next to diversify your savings.

By taking these steps now, you can save and look forward to a relaxing and enjoyable retirement.

Retirement Savings Goals By Age

Since you have your whole career to save for your retirement, it’s easy to put off investing. When you start saving early[EH4] , your money can work harder for you without investing as much.

Retirement Savings Goals

Financial experts agree to certain savings goals that Americans need to hit by certain ages to stay on track for retirement. While these are the standard guidelines, this assumes you’ll live a similar lifestyle in retirement.

Based on this chart, you need to have your annual salary saved for retirement at age 30. By age 40, you need to have three times your annual salary saved for retirement, and so on.

Retirement savings benchmarks are typically measured as a multiple of annual income rather than a fixed dollar amount.

Catching Up Before Age 50

If you are under the age of 50, you have more time to catch up your retirement savings. It will take some time and sacrifice to get caught up, but it is possible. Here is how you can start catching up.

Use Your Employer Match

If your employer offers a match, contribute as much as you can to maximize the match. Failing to do so is like leaving free money on the table. This also takes some of the burden off you since you can get caught up to your savings goal without contributing as much from your paycheck.

Contribute More

Annual contribution limits are established by the IRS and may change over time.

Boost Your Percentage Toward Savings

According to Fidelity, a good rule of thumb is to save 15% of your pre-tax income for retirement. This includes your employer match, so you can save 10% while your employer contributes 5%. However, this may not be a high enough percentage to get caught up if you are far behind. You may need to contribute 17% of your own income plus the match from your employer for a year or so to get your retirement savings on track.

Catching Up Over Age 50

If you are over the age of 50, you are quickly approaching retirement age. Since you have less time to catch up, implement these tips quickly to increase your savings.

Aim for a Higher Rate

You’ll likely need to save more than 15% of your income to start catching up for your savings goal. Since compound growth has less time to work to your advantage, you can counter this with larger regular contributions.

Take Advantage of Catch Up Contributions

Catch-up contributions allow workers age 50 and older to contribute more than the standard $24,500 limit to their retirement plans. You can also make contributions to a traditional or Roth IRA for the previous tax year up until the current year’s tax filing deadline for additional benefits.

Get on Track

Getting caught up when your savings are behind can feel emotionally and financially draining. Alltru offers free appointments with trained financial counselors to help you plan toward your financial goals.

Beginner Investing and Saving Mistakes

As you begin saving for retirement, your money has the potential to grow and work harder for you over time. Making smart financial decisions now can help you build a stronger foundation for the future. By understanding and avoiding common retirement savings mistakes, you can make the most of your investments and stay on track toward your long-term goals.

Not Saving Enough

One mistake that’s easy to make is not saving enough early on. By starting to save early, your money has more time to grow with compound growth. Whether you save with your employer’s plan, an IRA at Alltru, or both, aim to save 15% of your pre-tax income. Since you’re saving while you’re young, you should be able to meet the retirement savings by age goals by saving 15% of your income.

Not Investing Your Savings

This is a common mistake many make when beginning to save for retirement. This is especially true as many transition jobs. Remember, the money in an IRA account has to be invested. If you have money in an IRA but it’s not invested in stocks, bonds, annuities, or other options, it’s not going to grow! Make sure you opt into investment options within your IRA to see growth.

Not Using Your Employer’s Match

Your employer’s retirement match is free money on the table! If you are early in your career and don’t have the ability to contribute 15% of your income for retirement, start by just meeting your employer’s match. This way, you can still start saving for retirement while you work with your current budget to meet other short-term milestones.

Not Leaving Your Money Invested

Retirement accounts are created for you to invest money that you don’t need for years to come. If you withdraw money from a retirement account before age 59½, you’re making an “early” or “premature” distribution. As a result, you’ll have to pay a 10% early withdrawal tax. This should deter you from taking the money out early.

If you’re early in your career and worried about contributing too much that you can’t meet other short-term goals, consider maintaining separate savings for short-term goals and emergencies so you don’t need to withdraw retirement funds early. This way, your money is still growing interest, but you can still get access to the funds after a shorter period of time.

Ready to Invest?

Saving for retirement takes time. It can be easy to justify not investing for your retirement now because it seems so far away. While many Americans use this rationale, it’s not wise long term. By diversifying your investments early in your career, you can create sustainable living now while saving for a sustainable retirement. Our credit counselors and financial planners are here to help you create a plan to meet your goals now and for your retirement.