You’re taking money that you earned… money that you worked hard for… money that you could certainly put to good use now, and stashing it away for an unknown future need at an unknown future date.
However, do you know what’s worse than giving up a little income now?
Never being able to retire at all! Or being forced to work well into your 70s, 80s and beyond because you never started saving to begin with.
I would venture to guess that most people don’t want to work forever. Most people want to retire.
If you fall into that “most” category, then it’s wise to consider how to start saving for retirement as soon as you can. Here is a list of 8 easy ways to get started with saving for retirement.
1 – 401(k) and Other Employer-Sponsored Retirement Plans
One of the more common ways to save for retirement is through an employer-sponsored 401(k) plan. For many, saving for retirement in a 401(k) plan is their first option, and often turns into the largest retirement asset, and quite possibly the key factor to retirement success or failure.
The 401(k) plan is often the first vehicle people use to save for retirement. For many reasons, saving in a 401(k) plan may be the right thing to do.
- It’s often very easy: Upon obtaining employment and meeting eligibility requirements, your employer offers you the option to enroll in a 401(k) plan. You sign up, tell them how much you wish to contribute, and boom, the money is contributed directly from your paycheck.
- Employers match your contributions (sometimes): It’s not uncommon for your employer to match your contribution up to a stated amount. For example, an employer may match your contribution dollar for dollar up to 3%. This is essentially free money! Where else can you find that type of return?
- Your employer may contribute even more: Some employers offer an additional incentive to their employees known as a profit-sharing plan. In addition to (or in lieu of) a match (as described above), an employer may contribute to your account based on the profitability of the company. Once again, this is essentially free money.
- You may receive a tax benefit: When you contribute to your 401(k) plan, the money you contribute is a deduction from your earned income. This means that you will not be taxed on your contribution in the year it’s earned. Assuming an $18,000 contribution into a traditional 401(k) plan and a 25% tax bracket, we can calculate a hypothetical tax savings of $4,500.
- Your money grows tax deferred: Contributions to your 401(k) plan grow tax deferred, meaning that during the accumulation period, you’re not taxed on the growth in the account. You will only be taxed when the money is distributed from the 401(k).
- Your money may be tax-free: Many 401(k) plans offer a traditional 401(k) and a ROTH 401(k). A traditional 401(k) plan offers an immediate tax savings, but if you contribute to a ROTH 401(k), you will not receive an immediate tax deduction. However, assuming qualified distributions from a ROTH 401(k), no taxes will be paid on any earnings in the account.
2 – Your own retirement plan (if self-employed)
If you’re self-employed or you own a business, you have several options for your retirement plan.
Your first option may be to establish a 401(k) and profit-sharing plan for your company, as detailed above. As the business owner, you can make the decisions regarding specific benefits to provide your employees. These decisions include vesting schedules, eligibility requirements, matching contributions, and loan provisions. As you make these decisions, it is important to know that your choices may impact your ability to contribute to the plan.
Other options for self-employed business owners include a SEP-IRA and a Simple IRA. SEP and Simple IRAs have different provisions than their 401(k) cousin mentioned above. They also have different provisions than one another. Generally, SEPs and Simple IRAs are easier to administer than a 401(k) plan.
All three options have specific advantages and disadvantages that go beyond the scope of this article. However, in order to make the best decision, it’s important that a business owner considers the short and long-term projections for the company, the costs of the plans, and the funding intentions (just to name a few). Depending on the retirement plan implemented and the age of the business owner, it’s possible to contribute up to $61,000 (in 2018) per year into a plan.
3 – Other Retirement Accounts
In lieu of or in addition to other retirement plans, it’s common to consider an individual IRA or ROTH IRA. Individual and ROTH IRAs may be an ideal fit for someone who has a desire to save in excess of the retirement plans described above.
However, the IRS may limit contributions to either of these accounts based on other factors, including income and accessibility to other retirement plans.
4 – Non-IRA Account (brokerage account)
Non-IRA investment accounts are commonly used to invest income that is in excess of your current expense needs. For example, an employee may have maxed out their 401(k) and IRA options, but still have excess income. A non-IRA investment account might be a great option to invest these dollars via random contributions or via “forced savings” through a monthly contribution.
With a non-IRA investment account, money is contributed to an account and invested according to a stated risk tolerance. These contributions are often liquid and available to the saver, should they need to access the funds. However, liquidating the investments may lead to a tax implication. Funds in a brokerage account will be subject to short-term or long-term capital asset treatment.
5 – Sale of business
For many business owners, the ultimate sale of the business may be the source of funding a retirement plan. For these business owners, earned income is reinvested in the business or spent elsewhere, in hopes of creating a big payday.
Other business owners implement a different strategy. They create liquidity outside the business by saving in a 401(k) and/or in other non-IRA investment accounts. In addition, they hope for the big payday from the eventual sale of the business.
Whatever the strategy, a big check from the sale of the business may be a great way to fund retirement. One key question to consider post-sale is how the money will be invested. Furthermore, is it going to be enough to fund the retirement lifestyle desired?
6 –Downsize a Home
Home equity is often a noticeable percentage on a net worth statement. Unfortunately, home equity is not often as liquid and accessible to fund retirement (e.g., how can you take monthly income from your house to supplement your expense needs?).
For retirees, downsizing may be a good answer that has two retirement benefits. First of all, downsizing may free up time and resources that are being spent to keep the big house “together.” Secondly, downsizing may free up economic resources because expenses have lowered and the new house costs less.
If the new house costs less, then the excess cash is now liquid and available to use as a funding source for retirement.
7 – Restricted Stock and Other Stock Options
Restricted stock and other stock options may force the need to save outside a 401(k) plan. When restricted stock vests, the employee now owns shares of the company. These shares are outside a 401(k) plan, with no way to include them in the plan.
Moving forward, the employee can hold the shares or sell the shares. In either instance, the employee will likely be introduced to a non-IRA investment account.
8 – Pensions
Although quickly becoming a thing of the past, some retirees are lucky enough to have a pension. A pension is often a promise from your employer to pay you a specific amount after a specific period of time. This promise is part of your total compensation package.
Many employers offer their employees the option of taking a lump-sum pension or a pension in the form of an annuity.
A lump-sum pension is exactly what it sounds like – an employee elects to receive the entire amount at one time (which is often rolled into an IRA in a non-taxable event).
An annuity is payment for the rest of a retiree’s life (or even after their life) in lieu of a lump-sum payment.
Ways That Saving For Retirement Will Help
Saving for retirement is often accomplished by saving in a combination of the strategies detailed above.
Often, the first step is to simply start saving. Depending on your age, income, and expense needs, it may be suggested that you need to save 10%, 20% or more of your total income to meet your retirement needs.
Once the decision to save has been made, it’s important to consider where and how the money will be saved. A successful retirement plan is often one that considers the type of account, how much is being saved, and the short and long-term impact of taxes.