Financial Advisor Raleigh NC: Saving for Retirement by Age
In the early stages of their careers, many individuals tend to prioritize immediate financial obligations over saving for retirement. Saving for future life events can feel overwhelming when faced with immediate financial obligations like student loans and childcare expenses. Moreover, during their 20s and 30s, people are often striving to reach their full earning potential, leaving little room to save for a distant retirement.
However, commencing the retirement planning process early in one's career can pave the way for a significantly more comfortable future. Those who start contemplating and saving for retirement in their 20s and 30s tend to accumulate much more wealth compared to those who delay until their 40s or 50s.
The challenge for all savers lies in balancing their future financial security while also managing present cash flow. Here are some ways people in their 20s and 30s can start saving for retirement without ignoring their career and lifestyle.
Choose your retirement plan
There are generally two main types of retirement accounts: tax-deferred and post-tax. Tax-deferred retirement accounts encompass employer-sponsored plans like 401(k) or 403(b) and traditional Individual Retirement Accounts (IRAs). In these accounts, the contributions you make are not subject to immediate taxation. Instead, taxes are due when you withdraw funds during retirement, and the amount is determined based on your tax bracket at that time.
On the other hand, post-tax accounts, such as Roth 401(k)s and Roth IRAs, are funded with money on which you've already paid taxes before making the contribution. When you reach retirement and withdraw money from these accounts, you won't have to pay taxes on those distributions. Since the taxes were already taken care of when you contributed to the account, the withdrawals are tax-free during your retirement years.
Full Retirement Match
Regarding employer plans, it's essential to maximize the benefits they offer. If you have a 401(k), 403(b), or Thrift Savings Plan that includes an employer match, it's wise to take advantage of it fully each year. For instance, suppose your annual salary is $50,000, and your employer matches up to 4% of your contributions (equivalent to $2,000 annually). In that case, you should aim to contribute at least enough to receive the full match.
To illustrate, to obtain the entire $2,000 match, you need to contribute around $167 per month. By contributing less than this amount, you would be passing up on valuable employer contributions, essentially leaving free money on the table. Prioritizing the full match ensures you are making the most of your employer's generosity and optimizing your retirement savings.
Give your Future Self a Raise
Ensuring that you contribute enough to maximize the employer match is essential, but it's also worth considering contributing more to your workplace plan. To increase your retirement income, save more of your salary each year when you receive a pay raise while working. Even a small increase, like 1% each year, can have a significant impact on your retirement savings. As you progress into higher-earning years, you'll find yourself setting aside a substantial amount of money annually.
This "yearly raise" approach is equally applicable to contributions made to self-employed retirement plans, such as Simplified Employee Pension (SEP) or Savings Incentive Match Plan for Employees (SIMPLE IRA), as well as traditional or Roth IRAs. However, bear in mind that there are annual contribution limits for both traditional and Roth retirement accounts. To navigate these limits effectively, consulting a financial professional can help you determine the optimal contribution amounts for each account without exceeding the set limits.
Diversify your investments
Properly diversifying your investments and carefully allocating your retirement assets are crucial factors for a successful retirement. Most employer-sponsored plans, as well as traditional and Roth IRAs, provide a wide array of investment options. When setting up your retirement account, you have the flexibility to choose from these options and make adjustments as market conditions evolve or your financial goals change over time.
Certain retirement accounts offer target-date funds designed to be more growth-oriented during the early stages of your career and gradually become more conservative as retirement approaches. For instance, if your target date is 2053, your current target-date fund might consist of a balanced mix of large-cap, small-cap, and global equities, along with emerging markets. As the years progress, the fund may adjust its composition to include a greater proportion of fixed-income options like bond funds.
The process of selecting investment options for your retirement accounts might feel overwhelming. In such cases, a financial advisor can prove invaluable in identifying investments that align with your specific financial objectives. You can choose to work with an advisor of your preference, or your employer may collaborate with an advisor who possesses a comprehensive understanding of your workplace plan's intricacies. Their expertise can help you make informed investment decisions and optimize your retirement strategy.
Take advantage of other financial opportunities from Employer
In your 20s and 30s, paying attention to other aspects of your financial life can significantly impact your future and that of your family. If your employer offers life insurance, using it can give important coverage and benefits for your family. Using an HSA or FSA can save you money on taxes, helping your finances now and in the future.
SECURE 2.0 helps people struggling with student loan payments and saving for retirement. From 2024 onwards, employers will be able to match an employee's retirement plan contributions based on qualified student loan payments made by the employee.
This new provision allows you to focus on taking care of both your immediate and future financial needs, offering a welcome solution to the prior trade-off. Now, you can prioritize your current financial obligations while still investing in your retirement for a more secure future.
Bottom Line
Initiating the retirement savings journey in one's 20s and 30s lays the foundation for a more comfortable and secure future. The key is to take small, consistent steps towards saving.
If you find it challenging to contribute enough to receive the employer match in your workplace plan, start with a smaller amount and gradually increase it over time. Beginning early with retirement savings enhances your chances of achieving the lifestyle you desire during your later years. It is always a good idea to consult with a financial advisor towards helping you achieve your financial goals.
Sources:
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This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.
These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.
Target date funds (“funds”) are built for investors who expect to start gradual withdrawals of fund assets on the target date, to begin covering expenses in retirement. The principal value of the funds is not guaranteed at any time and will continue to fluctuate up to and after the target date. There is no guarantee the funds will provide adequate income at or through retirement.
Target Date Funds are an asset mix of stocks, bonds and other investments that automatically becomes more conservative as the fund approaches its target retirement date and beyond. The funds are subject to market volatility and risks associated with the underlying investments. Risks include exposure to international and emerging markets, small company and sector equity securities, and fixed income securities subject to changes in inflation, market valuations, liquidity, prepayments, and early redemption. Diversification and asset allocation do not eliminate the risks of investment losses.