For younger workers, retirement may seem like a distant event that doesn’t bear a great deal of consideration. Most of us realize that we should be putting some money away, but comparatively few actually do so. And those who do may not be saving enough.
Too many workers continue to rely on Social Security and pensions as their main source of retirement income, and see savings as a way to have extra money. But these days, that kind of thinking is seriously flawed. It’s entirely possible that Social Security may not exist in a few short decades, and even if it does, it could pay less than it does now when accounting for inflation. Pensions are also becoming a thing of the past. So it’s up to us to make sure we have enough retirement savings to live on.
How Much Money Do I Need to Save?
There are many different ideas regarding how much money we need after retirement. Some advocate saving up a few million dollars so that one can live off the interest. Others reason that if you pay off your debts by the time you reach retirement age, you won’t need anywhere near that much.
But most experts suggest that one should save enough to have 70 to 90 percent of one’s annual pre-retirement income each year after retirement for 20 years. These numbers should take inflation into account, which is generally estimated at 3% per year, as well as investment returns before and after retirement. The final figure will vary for each individual, but as you can see, this will add up to a substantial amount of money.
Once you’ve figured out how much you’ll need altogether, you need to calculate how much you must save each month to reach that goal. To do this, count the number of years until you plan to retire, multiply by 12, and divide your total by that number. If math is not your strong suit, you can find retirement calculators online that will run the numbers for you.
The Best Time to Start Saving Is Now
Even if it seems like retirement is eons away, it’s important to start saving as early as possible. Ideally, we should start saving for retirement from the time we start our first jobs and continue to do so consistently for the remainder of our working lives. But in practice, it rarely works that way.
Just remember that the earlier you start saving for retirement, the more painless it will be. For each year you postpone saving, you’ll have to save a little more each month to reach your goal. If you keep procrastinating for years and years, you’ll eventually have to put a significant portion of your income toward retirement. So there’s no time like the present to start planning for your golden years.
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Savings should be a part of everyone’s financial plans. We all need some money put back for a rainy day. Saving for our children’s college education is also important. And having a retirement fund is a must.
Putting our savings under a mattress isn’t a very good strategy. Not only could it be stolen or burned up in a fire, but it doesn’t earn interest. Putting our savings in the bank keeps it safe and allows it to earn interest, allowing us to come out ahead. But how far you come out ahead depends on the bank and the account you choose.
When it comes to general purpose savings, most people opt for a regular savings account. Such accounts earn rather low interest, but they give us quick and easy access to our money. Some banks allow us to link them to a checking account for quick deposits and withdrawals, and some even provide debit cards.
In order to earn higher interest rates, we must usually deposit larger amounts of money. Some accounts pay varying interest rates depending on the balance. Others have a minimum balance that must be met to avoid fees, but pay higher interest no matter what the balance. And then there are money market accounts and certificates of deposit, which are best suited to those who plan to leave a significant amount of money in the bank for several months or years.
For retirement savings, a 401K is usually the best option. These plans are made available through employers and allow employees to make pre-tax contributions from their earnings, and interest earned is not taxable. The employer may even match the contribution up to a certain amount. If a 401K is not an option, an IRA can be opened at a bank. Contributions are made with after-tax dollars, but the interest earned is not taxed.
There are a few options for college savings. A 529 plan is similar to an IRA, but is used for college expenses instead of retirement. The Coverdell ESA is often used in conjunction with a 529 plan, but there are some differences such as contribution and age limits.
When planning to open a savings account of any kind, it’s important to do some research. High interest rates are a definite advantage. But you also need an account that gives you the level of access to your money that you want. Fees should also be taken into consideration, as they can cancel out your interest earnings.
Credit unions are one of the best places to start your search for a savings account. These member-owned institutions usually offer competitive rates and many other benefits. Membership is usually restricted to those who live in certain areas or work for certain companies.
Online banks have been giving traditional banks a run for their money when it comes to savings accounts. They tend to offer more competitive rates, and may offer features that you can’t get from your local bank. But some local banks are more competitive than others, and they offer something that online banks cannot: face-to-face service.
Finding the right savings account can help you get the most out of your money. But it’s important to consider your needs carefully before you choose. The best account for your neighbor, sister or friend could be completely wrong for you.
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For some, investing is a way of life. For others, it’s an obscure concept that they’ve never explored. But if you have ever opened a savings account or put money into a retirement fund, you’ve dabbled in investing.
By definition, investing is using our money in certain ways with the hopes that it will make us more money in the long run. For businesses, this often involves purchasing equipment or inventory. For individuals and banks, it usually involves the purchase of financial products.
Take a basic savings account for example. We put money into the account, and the bank adds interest at a specified rate. If we deposit a certain amount of money and leave it there for a year, there will be more money in the account at the end of that year than when we started. This is investing in its simplest form.
There are many types of investments available. They range from very safe to very risky. Some require no minimum amount to get started, while others require thousands of dollars. Here are some of the more common types of investments:
* 401Ks – Most companies that offer employee benefits offer 401K plans. A 401K is a retirement savings fund. Employees agree to have a certain amount withheld from their pay before taxes and put into the fund. Employers often match employee contributions up to a specified amount, and all contributions are invested in a fund of the employee’s choice. The fund is intended to be maintained until retirement, but employees may be allowed to borrow from it. Early distributions result in tax penalties.
* IRAs – These are similar to 401Ks, but they are set up by individuals rather than employers. The money invested has already been taxed unless it is rolled over from a 401K, but there are still certain tax advantages.
* Mutual funds – These funds are made up of different stocks and bonds, and are under the control of professional money managers. This is how many investors get started in the stock market.
* Certificates of deposit – Certificates of deposit, or CDs, require investors to lend money to a bank for a specified period of time. When this time is up, the CD is said to have reached maturity and the investor can withdraw his capital and interest.
* Money market accounts – These are similar to CDs, but investors may withdraw money from their accounts at any time. Higher interest is paid to investors who make higher deposits.
Investing is not just for the rich. There are investment opportunities that virtually anyone can take advantage of, and they are not necessarily complicated. By starting out small and simple, you can get a taste of investing without a great deal of risk. Once you’re comfortable with that, you can move on to investments with greater potential.
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