Why You Should Start Saving for Retirement Early
Retirement may not be on your radar, especially if it is decades down the road. But it’s never too early to plan for it. With the rising cost of living, your retirement nest egg may need to be bigger than expected to live comfortably. With longer life expectancies, dwindling pensions, lower Social Security benefits and higher healthcare costs, you should start saving early for retirement. In this blog, we’ll discuss various ways to maximize your retirement savings.
Why Should You Start Saving for Retirement Early?
The cost of living in the U.S. has increased significantly over the past few years, affecting everyone, including those on a fixed income. Retirees are expected to pay $172,000 or 30% of their Social Security income on healthcare throughout their retirement, according to Investopedia.com. This can leave retirees with less income for living expenses, traveling and emergencies.
Saving for retirement early in life helps you build a bigger retirement savings. In fact, there’s a growing wave of young adults who are saving more for retirement now, according to Reuters.
How to Start Saving for Retirement
Saving for retirement isn’t complicated. The key is consistency. Also, keeping your retirement accounts separate from your regular savings helps put you in the right frame of mind because you aren’t mingling your short-term savings or checking accounts with your retirement funds.
Here are some of the ways you can save separately for retirement.
- Retirement Plans for Self-Employed Workers and Small Business Owners: Your employer may offer retirement accounts to help you save for retirement. Depending on the company, your workplace may even match a certain percentage of your contributions. The most common workplace plans in the U.S. are 401(k) and 403(b) plans. A provider chosen by your employer typically administers these plans. You simply set up payroll deductions to the account and monitor it.
Not every employer offers these plans or any other retirement plan. It is important to check with your employer. If your employer doesn’t offer a plan, you can save for retirement through other means.
- Individual Retirement Accounts (IRAs): An IRA is an account you can open on your own specifically for retirement savings. These accounts can be opened through your preferred financial institution, if offered. IRA accounts are solely for retirement and drawing from them before the retirement age may be penalized through fees. The two main IRA accounts are the Traditional IRA and the Roth IRA.
Traditional IRAs are tax-deferred, which can allow your contributions to grow without being taxed until you withdraw for retirement purposes. Roth IRAs are funded with after-tax contributions, allowing qualified retirement withdrawals to be tax-free. Depending on your preference, opening either can be a great way to save for retirement in conjunction with workplace retirement plans or just on your own.
- Self-Employed and Small Business Retirement Savings: Self-employed individuals or small business owners also have options to save for retirement. The Simplified Employee Pension IRA allows those who are self-employed or small business owners to make tax-deductible contributions for themselves or employees. SIMPLE IRA, otherwise known as Savings Incentive Match Plan for Employees, is designed for small businesses who have 100 or less employees where the employer will match what the employee puts into the plan.
Small business owners with no employees have the option to open a Solo 401(k), which can allow them to have higher contribution limits. These options for self-employed individuals and for small business owners with or without employees can help kickstart their retirement savings.
Planning for retirement early can help you decide which retirement plan is right for you and your unique financial situation. Whether you are with an employer that offers workplace retirement options or you are a small business owner looking to kick-start your own retirement savings, there are options available to help you start saving for retirement early.
Low-Risk vs. Market-Based Retirement Savings
Retirement accounts can be risk-based depending on the type of account. Risk-based accounts such as the 401(k) and 403(b) rely on the stock market, which can increase or decrease the balance of your account depending on market volatility. Lower-risk retirement accounts such as the Traditional and Roth IRAs typically do not invest in the stock market and are opened through a bank or credit union. Typically, these accounts are protected by the National Credit Union Administration (NCUA) for credit unions or the Federal Deposit Insurance Corporation (FDIC) for banks.
There are some IRA products, however, that allow the account holder to invest in stocks, bonds and/or mutual funds, in which they would not be federally insured. Only IRA accounts that are deposit products such as an IRA Savings account, IRA Shared Certificate and IRA Money Market Account are insured by either the NCUA or the FDIC.
Developing a plan early for your retirement savings, based on your unique financial situation, will allow you to be better prepared for retirement.
How Travis Credit Union Can Help with Retirement Planning
Travis Credit Union is here to help on your retirement savings journey. We offer retirement education through Knowledge Base to help you learn more about the savings options. These courses include Saving Enough for Retirement and Preparing to Retire.
Also, TCU offers Individual Retirement Accounts and a variety of savings accounts that are insured through the National Credit Union Administration (NCUA). Visit Traviscu.org for more information.
Frequently Asked Questions
Why is it important to start saving for retirement as early as possible?
Starting early gives your savings more time to grow and helps you build a larger retirement nest egg over time. It can also better prepare you for rising living expenses, healthcare costs and a longer retirement.
How can rising healthcare costs affect retirement savings?
Healthcare expenses can consume a significant portion of a retiree's income during retirement. Saving early may help ensure you have enough funds available for both medical expenses and everyday living costs.
What is one of the most important habits for successful retirement saving?
Consistency is one of the most important factors in building retirement savings. Making regular contributions can help you grow your retirement funds over time.
Why should retirement savings be kept separate from regular savings accounts?
Keeping retirement savings separate can help you stay focused on long-term financial goals. It also reduces the temptation to use retirement funds for short-term expenses.
What are the most common employer-sponsored retirement plans?
Many employers offer 401(k) or 403(b) retirement plans to help employees save for retirement. Some employers may also match a portion of employee contributions, helping savings grow faster.
What should you do if your employer does not offer a retirement plan?
You can explore alternative retirement savings options such as Individual Retirement Accounts (IRAs). These accounts allow individuals to save independently for retirement through a financial institution.
What is the difference between a Traditional IRA and a Roth IRA?
A Traditional IRA allows contributions to grow on a tax-deferred basis until withdrawals are made in retirement. A Roth IRA is funded with after-tax contributions, allowing qualified withdrawals in retirement to be tax-free.
What retirement savings options are available for self-employed individuals and small business owners?
Self-employed individuals and small business owners may consider options such as SEP IRAs, SIMPLE IRAs, or Solo 401(k) plans. These accounts are designed to help business owners and employees save for retirement while offering potential tax advantages.
How do market-based retirement accounts differ from low-risk retirement accounts?
Market-based retirement accounts, such as many 401(k) and 403(b) plans, can fluctuate in value based on market performance. Some low-risk retirement savings products offered through banks and credit unions provide federally insured protection for eligible deposits.
How can Travis Credit Union help with retirement planning?
Travis Credit Union offers financial education resources to help members learn about retirement savings and planning. It also provides Individual Retirement Accounts and insured savings products designed to support retirement goals.