After finishing school, most of us enter the workforce. Without work, we wouldn’t be able to go out, pay the bills, or support our loved ones. But what happens after retirement? How are you supposed to continue to enjoy life without a steady income?
This is where retirement savings come in. Let’s examine what these savings cover, how much to save and how to plan for retirement.
What Are Retirement Savings?
Retirement savings refer to the amount of money you save to help cover the cost of living once you’re no longer working regularly. Most Americans stop working at around age 64. These savings help cover the following:
- Housing: Many older adults choose to move into retirement homes or senior living facilities as they get older.
- Medical expenses: Over time, you will likely require more health check-ups.
- Extracurriculars: Several retired individuals use their saved money to travel or explore new activities and interests.
- Risk management: Savings help prepare for unforeseen events, such as emergencies or tax increases.
About 15% of Americans have no retirement plans, which may cause them to get into debt later on. You must prepare for your future by saving early.
How Much Should I Save For Retirement?
When it comes to retirement savings, people commonly ask: how much should I save? There’s no pre-determined amount that you have to save. Rather, your savings should be proportionate to your income level. Most experts agree that you should aim to save around 80% of your overall pre-retirement salary.
To help you accomplish this, Fidelity recommends saving 15% of your pre-tax annual income. So, say you earn $50,000 a year before taxes. About $7,500 of that should be set aside for retirement each year.
It would help if you tried to start saving once you graduate from school and start working. About 39% of Americans begin saving for retirement in their 20s. The earlier you begin saving, the more money you’ll end up having in the future. While this may sound challenging, there are resources available to help you prepare.
How Do I Save For Retirement?
Here are some of the top ways to save for retirement.
401(k) Plan
Many employers will help you prepare for retirement by offering a 401(k) plan. Under this plan, a percentage of every paycheck will go towards your retirement savings, and your employer may match all or part of this amount.
401(k) funds generally grow in value over time. While you can choose how much you contribute, there is a limit — as of 2021, you and your employer cannot collectively contribute over $58,000 to your 401(k). However, if you’re over the age of 50, this limit goes up to $63,500.
Individual Retirement Account (IRA)
If a 401(k) isn’t enough to help you meet your retirement goals, consider opening an IRA. By investing your money into this account, you can grow it on either a tax-free or tax-deferred basis. Here’s a quick rundown of how both these options work:
- Tax-free: In this type of plan, you deposit money that you’ve already paid taxes on. You can later withdraw these funds without having to pay taxes.
- Tax-deferred: You don’t have to pay taxes until you withdraw the funds with a tax-deferred plan. If you’re in a lower tax bracket after retirement, this can help save money in the long run.
Whether you choose a tax-free or tax-deferred account, the money has the potential to grow over time.
Consult A Retirement Planner
Are you completely lost on how to get started with saving? If you have the budget for it, consider consulting a retirement advisor. After reviewing your current finances, they can help you develop a savings plan that will help ensure you’re happy and healthy after retirement.