MJP –
When you envision your ideal retirement, you probably aren’t thinking about having to work during those years. However, for a significant number of Americans, this is a reality they must face. A survey conducted by the Pew Research Center in 2023 revealed that nearly 1 in 5 Americans aged 65 and older, or 19%, were still employed.
This situation arises from a variety of factors, such as insufficient savings or underestimating the expenses they would need to cover in retirement. While these challenges are real, there are actionable steps you can take to reduce the likelihood of having to work during your golden years.
One of the most critical actions you can take is to begin saving for retirement as early as possible. The power of compound interest cannot be overstated, and it is a key reason financial experts constantly emphasize the importance of early savings. The sooner you start, the more time your money has to grow. Even if you can only set aside a small amount now, those contributions are more valuable than the ones you might make closer to retirement.
For instance, imagine starting to save for retirement at age 25. If you save $1,800 annually (equivalent to $150 per month) in a 401(k) with an annual return of 7%, you could accumulate just over $359,000 by the time you reach 65, assuming you don’t increase your contributions.
On the other hand, if you delay saving until age 35 and contribute $300 per month (twice as much as in the first scenario), your savings would grow to approximately $340,000 by age 65, with the same annual return
How to begin saving money for retirement
To facilitate the process of saving, reach out to your employer about setting up 401(k) contributions if you haven’t done so already. Once established, these contributions will be automatically deducted from your paychecks, ensuring consistent savings over time.
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In addition to starting early, another powerful strategy to enhance your retirement savings is to take full advantage of any employer match offered. An employer match is essentially free money, and contributing enough each month to receive this match can significantly boost your retirement fund.
For example, if your employer matches contributions up to 3% of your annual salary and you earn $50,000 per year, you could receive an additional $1,500 per year in retirement contributions. Over 40 years, assuming a 7% annual return, that single year of matching contributions could grow to just over $22,000.
To adjust your contribution amount, you’ll need to contact your retirement plan provider. It’s also a good idea to revisit your contribution levels annually, especially if you remain with the same employer for several years. Regularly increasing your contributions as your income grows can further enhance your retirement savings.
Open and invest in a Roth IRA
Another effective way to prepare for retirement is by opening and investing in a Roth IRA (Individual Retirement Account). While investing in a retirement fund is a long-term commitment, it is important to consider how taxes will impact your funds in retirement.
The more taxes you owe during retirement, the less money you’ll have available, which could force you to return to work to supplement your income. A Roth IRA can help mitigate this risk.
Unlike a 401(k) or traditional IRA, contributions to a Roth IRA do not reduce your taxable income in the present. However, the advantage lies in the fact that withdrawals during retirement are tax-free. This can be especially beneficial if you find yourself in a higher tax bracket, as it reduces your tax burden when you need the funds most.
It’s important to note that the contribution limits for IRAs apply to both Roth and traditional accounts. As of 2024, the contribution limit is set at $7,000 annually, or $8,000 if you’re 50 or older.
To open a Roth IRA, you will need to choose a provider and apply for an account. Once established, you can set up recurring contributions or opt for larger, less frequent deposits, such as quarterly or annually. After funding the account, it’s crucial to invest the money to ensure it grows over time.
