Retirement planning is essential at any age. After all, with traditional pensions becoming exceptions rather than the rule for today’s workers, you may have to rely on your own savings for at least part of your retirement income. Therefore, the sooner you start saving for retirement, the better. Here are 5 retirement planning strategies to implement in your 20s and 30s that can help to ensure that you are on track for a comfortable retirement.
Take Advantage of Employer Retirement Plan Options. If your employer offers a retirement plan and matches all or part of employee contributions to the plan, taking full advantage of this perk can be a good way to kick start your retirement savings for two reasons. First, it is like getting a tax-free pay raise, so it is silly to pass it up. Second, it will give your retirement savings a jump start early in the game, when the money has the longest time to grow. Even if your employer-sponsored retirement plan doesn’t have a match, contributing to it can still make sense, since your contributions will be tax deductible and your account balance will grow tax-free until you withdraw it.
Open a Retirement Account for Yourself, Even If You Are Married. If you are married, you and your spouse should develop a joint retirement savings plan. However, since many marriages end in divorce, it is a good idea not to have all your joint retirement savings in one spouse’s account. If you and your spouse both have employer-sponsored retirement plans, you could split your retirement savings between the two. In fact, if both plans have employer matches, this will allow you to take advantage of this perk at both firms. If one of you doesn’t work or doesn’t have a work-sponsored plan, look into options to open a traditional or Roth IRA for that spouse.
Put Contributions on Automatic Pilot. If possible, have retirement plan contributions deducted from your paycheck and contributed directly to your retirement account. With automatic deductions, you are less likely to miss that money or to skip or delay contributions.
Sock Away as Much as You Can. When you are in your 20s and 30s your retirement plan balances have decades to grow and, as a result, even small amounts can turn into large sums. Therefore, the more you can put into retirement accounts when you are young, the more likely you will be to achieve your retirement goals.
Don’t Overlook the Role of IRAs in Your Retirement Plan. If your employer doesn’t offer a retirement plan, open an IRA and, if possible, max out your contributions to it every year. Even if you have an employer-sponsored retirement plan, you may be able to contribute to an IRA as well (depending on your income). Since IRAs have more investment options than 401Ks, one retirement planning strategy to consider is to contribute enough to a 401k to earn the full employee match, then to invest in an IRA up to the maximum allowed before investing additional funds in the 401k. If your firm does not offer a 401k match, you could invest in your IRA first before contributing to the 401k. Whether you open a traditional or a Roth IRA will depend on your circumstances. Some financial advisors like Roth IRAs for young people, because, although your contributions are not tax deductible, the balance grows tax free and withdrawals are tax free as well.
Philip Taylor, ptmoney.com, Roth IRA vs 401k
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