July 26, 2018
July 26, 2018
The hardest part of saving for retirement is probably just getting started. That can be an obstacle if you don’t know what your options are. But there are different ways you can start saving for retirement, it’s just a matter of choosing which works best for you.
Here are some ways to start saving for retirement today, and without any hassle.
Many employers offer either a 401(k) or a 403(b) plan. These are excellent plans to participate in because not only do they enable you to invest up to $18,500 per year (or $24,500 if you’re 50 or older), but you also get a tax deduction for making the contribution.
But don’t avoid contributing because you’ll never be able to reach the maximum amount. When it comes to retirement planning, you can start small, and increase your contributions over time.
For example, you may start out contributing just 3% of your pay to the plan in the first year. In the second year, you might increase it to 4%, then 5% in the third year, and so on.
You can time the increased contributions with pay raises. For example, let’s say you get a 3% raise. You can allocate an additional 1% to your retirement contribution, and keep the remaining 2% for basic living expenses.
With many employer-sponsored retirement plans, the employer offers a matching contribution. For example, the employer may match 50% of your contribution up to, say, 6%. If they do, you should try to contribute 6% of your pay, which will produce the maximum employer match of 3%. That will give you a total annual contribution of 9% of your salary.
If you don’t have an employer-sponsored retirement plan, or if you’re self-employed, you can open an individual retirement account (IRA). You can contribute up to $5,500 per year, or $6,500 if you’re 50 or older. One of the advantages with IRA accounts is that they’re self-directed. That means you can choose the trustee, whether that’s a bank, a brokerage firm, a mutual fund company, or a robo-advisor (see below). You can even choose how you want to invest your money within those accounts.
You can fund your IRA with payroll deductions. Just as you would set up payroll deductions for checking and savings accounts, you can do the same with an IRA account. That would make the savings processed automatic, and largely out of sight.
IRAs come in two primary “flavors”, traditional and Roth.
With a traditional IRA, your contributions to the plan are tax deductible. Investment earnings accumulate on a tax-deferred basis. You are eligible to begin making withdrawals from the plan at age 59 ½. Once you do, the withdrawals will be subject to ordinary income tax. If you make withdrawals prior to turning 59 ½, they’ll be subject to ordinary income tax, plus a 10% early withdrawal penalty.
Roth IRA contributions are not tax-deductible. But investment earnings on those contributions also grow on a tax-deferred basis. However, once you reach age 59 ½, and as long as you have been in the plan for at least five years, you can begin with taking distributions from the plan tax-free.
Roth IRAs have another positive twist. Since contributions are not tax-deductible, they can be withdrawn at any time, without being subject to either tax or penalty. This is referred to as IRS Roth IRA ordering rules. Under ordering rules, the first money withdrawn from a Roth IRA is always contributions.
For example, let’s say you have $20,000 in a Roth IRA, comprised of $15,000 in contributions, and $5,000 in accumulated investment income. You withdraw $7,500 from the account, perhaps to purchase a home. Since the amount withdrawn is less than your total contributions, they’re free from taxes and the early withdrawal penalty.
One of the most interesting options for an IRA are so-called robo-advisor accounts. They offer professional investment management at very low fees. The robo-advisor first determines your investment goals, time horizon, and risk tolerance. Then they build a portfolio of stocks and bonds held in a small number of low-cost exchange traded funds (ETFs).
Since each fund is comprised of hundreds of different securities, your total portfolio exposure will cover thousands of securities, including both stocks and bonds.
Two of the most popular robo-advisors are Betterment and Wealthfront. Each charges an annual management fee of just 0.25% of your investment. That means you can have $10,000 professionally managed for just $25 per year.
Wealthfront has a minimum initial investment of just $500, but Betterment allows you to open an account with $0, then set up recurring monthly contributions. You can do this through payroll deductions.
The big advantage of robo-advisors is that you can set them up as IRAs, have all of the investment management handled for you, and your only responsibility is to fund the account.
There are apps available, referred to as micro-savings apps, that will enable you to save small amounts of money by allocating a little bit of cash to savings from every purchase you make. The apps tie into your checking account, and each time you use the account to make a purchase, a small amount of money goes into a savings or investment account.
It works something like this: you purchase a cup of coffee for $4.25. The micro-savings app adds $.75 to the charge, making it even $5. The coffee vendor gets $4.25, and $.75 goes to the designated savings account.
Since you probably use your checking account debit card to make 30, 40 or 50 transactions in a typical month, you can add anywhere from $15-$25 to savings each month.
One such app is Acorns. They refer to the savings process as “Round-ups”. That is, each purchase is rounded up to a higher dollar threshold. Not only does that extra change go to savings, but it can also go into an IRA account, referred to as Acorns Later. You can even make one-time contributions of flat dollar amounts into the account anytime you choose.
Micro-savings apps are a savings plan for people who can’t save. They enable you to accumulate savings, even for retirement, through normal buying activity. It’s the perfect passive way to save money if you haven’t been able to get that started in the past.
There are more ways to start saving for retirement than ever before. It’s just a matter of choosing the method, then getting started. You don’t even need a lot of money – you can start small, and increase your contributions over time.