Knowing how to save for retirement is important. Even if you feel like it’s a long way off, remember that people are living longer. When your last day of work does arrive, you may have decades of life left. With Social Security in uncertain straits, you don’t want to run out of money in those decades.
A 401k is an employer-sponsored plan that takes a certain percentage of money out of each paycheck. You elect the percentage, which generally varies from one percent to five percent. The withdrawal is tax-free, which makes it a great way to save. It’s also automated, which is not only convenient but also increases the chances of it not being spent on the way to being saved.
In some organizations, employers match the percentage an employee has chosen to contribute. So if you have three percent of your salary withdrawn to place in a 401k, three percent more is contributed by your employer. Six percent of your salary is being contributed to your 401k. Sweet, eh?
The benefits of 401k’s are one of the reasons people with them save more for retirement than those without. On average, people with a 401k have $87,000 saved for their golden years. People who don’t have 401k’s have about $10,000 saved.
This may be disturbing to hear if you don’t have a 401k. Fear not, though. You’re not alone. More than 40 percent of Americans don’t have access to a 401k plan. Part of the availability may depend on your employer’s size. Fifty percent of full-time employees whose companies employ less than 100 people don’t have 401k’s. But 82 percent of people who work for midsize or large companies do have them.
The other reason to fear not, though, is there are many options to save for retirement. Here are four.
1. Start an Individual Retirement Account with Tax-Free Contributions
If you’re gnashing your teeth at the idea tax-free savings for retirement is closed to you … don’t. It isn’t.
Anyone can start an Individual Retirement Account (IRA). IRA contributions are tax-free. You can set up monthly contributions. You will need to open your own account with a brokerage or mutual fund advisor. Direct deposit from your paycheck is possible with many of these. You choose the investments and the percentage. Be sure to do your research to find brokers/advisors with low fees. Shop around.
Here are the rules:
If you are married, both of you can contribute this amount, even if just one person works, so you are able to save $11,000 tax-free annually.
If you are more than 50 years old, the limit increases, to $6,500.
Withdrawals will be taxed when you take them. Note that you will pay a penalty on any withdrawals before you are 59½ years old.
2. Start a Roth IRA for Tax-Free Appreciation
Wait, didn’t we just say “open an IRA?” Yes, we did. There are two types of IRAs, though, and the tax picture is very different.
Standard IRAs, as we just told you, are tax-free. In a Roth IRA, you contribute money that has already been taxed. But it grows tax free after you deposit it in an IRA. When you retire and withdraw money from a Roth IRA, it is not taxed.
It’s a good idea to speak to a tax professional about the pros and cons of a standard IRA versus a Roth IRA for your individual situation. For our purposes, though, the point is clear. Both help you save for retirement.
3. Save Your Tax Return or Bonus
One of the obstacles to saving for retirement is the number of things you want to buy. Furniture. Food. Smartphones. Money doesn’t have to be spent on frivolous or expensive things to vanish quickly.
Because of this phenomenon, retirement saving strategies often focus on methods of getting chunks of money into a retirement account. If you are expecting a large tax return or receive annual bonuses, earmark a percentage for a retirement account.
And yes, you can place it in a Roth IRA. One retirement saving strategy does not preclude another.
4. Include Retirement Savings Considerations in Your Career Plan
One of the best ways to save for retirement if you don’t have a 401k is to plan your career with retirement savings in mind. Many people don’t. The end result is a retirement without much in savings.
There are two ways to include retirement savings considerations in your career plan. First, when you are looking for a new job, be sure to ask about the existence of a 401k plan and matching employer contributions. By itself, a matching 401k is not sufficient reason to take a job. But combined with a good offer? It can set you up for a secure retirement.
Second, always train and work toward promotions that will bring you additional pay. Put part of the salary or bonus increase in retirement savings.
Many people in the U.S. don’t have a 401k plan. That’s okay. While 401k’s are great, there are multiple ways to plan and execute retirement savings without one.