Saving for retirement is a race, and you don’t want to fall behind into that group of slackers at the back of the pack. If you think it’s all about complicated investment strategies and other nebulous concepts out of your control that you don’t fully understand, it’s not. I mean, some of it is — but a lot of it isn’t. We’re here to tell you that there are things you can do to feather your retirement nest in a fluffier way.
Set Retirement Goals
Before we get to how you should manage your retirement accounts, you must determine what you want or expect out of them. How much money will you need or want in retirement? If you’re 25, it can be a little harder to answer these questions, since almost everything will be variable at this point. Older folks will want to consider such questions as:
- How much income do my spouse and I earn now, and how much do we want to save for retirement? If you are divorced, this life change could impact your retirement in a number of ways. First, if you were married long enough, you may collect more Social Security in retirement based on your spouse’s work history, or you may get less, if your spouse is entitled to some of yours. The same applies to any existing retirement accounts — you may get more or less, depending on whose account it is and the length of your marriage.
- How much money do you need to live happily (or comfortably) in retirement? To determine this number, make a guess as to how much your monthly expenses will be, then add on a figure for how much you expect to spend on extras such as travel. (Warning: This number may be different from what your spouse had in mind.)
- What types of hurdles might you need to clear to reach your goal? This could include known situations such as medical conditions, expected expenses such as tuition or a wedding, or unexpected hits such as a job loss or even the death of a spouse.
Once you have a prize to keep your eye on, you can start saving toward it with purpose.
Prioritizing IRA Contributions in Your Budget
We can’t stress this too highly: Do not wait until “later” to begin saving for retirement. The biggest drawback of waiting is that your retirement savings grows exponentially over time. It’s not like saving $5,000 a year for 10 years and getting $50,000. It’s like saving $5,000 at 8% interest for $5,400 the first year, $5,832 the next year and so on until you get $67,432 in year 10. The later you start, the harder it is to catch up.
When you’re young, retirement seems far off, so you may be tempted to take your $5K and go to Disney World or buy some really sick electronics because the reward would be immediate. But imagine yourself in retirement, only able to eat pizza Mondays through Thursdays when you can use the coupon. It’s a sobering thought.
Regardless of your age, you may fully understand the value of saving for retirement, but at the same time believe you cannot afford it. You may be in significant debt, whether it’s due to college loans, medical bills or some other reason. And while it’s important to pay down debt as quickly as possible, most financial experts advise against putting all your money toward your debt and none into your retirement savings. One reason is the one outlined above — your nest egg will grow bigger over a longer period of time — but also because it can take you decades to pay down your debt, and by the time you’re done, it may be too late to start saving for retirement.
Many companies that sponsor a retirement plan like an IRA automatically take 3% of your income out of your paycheck to deposit into your account. You may opt out, but most employees won’t go to the trouble. This favor is not borne of 100% altruism — companies benefit from higher levels of employee participation. But so do the employees.
If you think you can’t afford to contribute much to your IRA, go over your personal budget and look for areas to cut in order to free up more money for retirement. You’ll thank yourself later.
Understand IRA Contribution Limits
Now that we’ve hammered the point home about contributing as much as you can to your retirement account, we’re going to tell you that there’s a limit. The contribution limit for a 401(k) is much higher than an IRA, which is why an employer-sponsored 401(k) is so much more desirable. But an IRA is nothing to sneeze at!
For 2024, the contribution limit for an IRA is $7,000 if you’re under 50, $8,000 if you’re not. Next year, in 2025, the limits will go up again, and it’s useful to keep them in mind. These amounts often seem more affordable, and if your company offers an employer match, it will be even easier for you to contribute the maximum toward your IRA.
Traditional IRA vs. Roth IRA
If your company lets you choose between a traditional and Roth IRA, you’re going to want to understand the difference between the two. Essentially, a Roth IRA is money you contribute after taxes, and contributions to a traditional IRA are taken out before taxes. So, with a traditional IRA, when you retire and begin to draw on your account, taxes are taken out of each payment. With the Roth, you’ve already paid your taxes, so withdrawals are tax-free.
It may sound like six of one, half-dozen of the other, and it could be, but prevailing wisdom says to go with the Roth if you are younger, because you likely will be in a higher tax bracket by the time you retire, and if you pay your taxes now, when you’re in a lower tax bracket, you could save money.
Final Tips on Maximizing Returns on Your IRA
If you have the time and the interest, you may want to educate yourself further on subjects such as risk and return on investments, diversification for advanced growth, rebalancing your portfolio and how life changes can impact your accounts. If studying these subjects isn’t your idea of after-hours fun, you may want to consider discussing your retirement goals with a financial advisor. Regardless of which of these options you choose — or if you choose neither — the bottom line is that starting early and making regular contributions is the best way to a comfortable retirement.
