The idea of your future retirement plans can seem daunting, but thinking about it early can make a huge difference in your financial future. Continue reading to learn why early retirement planning is important and take away some strategies to get started.
The Power of Compounding Interest
The biggest reason why starting to save as early as possible is important is due to compounding interest. This means you earn interest not only on your initial savings, but you also accumulate more interest over time. Essentially, the earlier you start saving, the more time your money has to grow.
For instance, if you start saving $100 a month at age 25 with an annual interest rate of 5%, you would have over $450,000 by the time you are 65. This would of course decrease if you decided to start saving later in life. Starting your savings journey early can significantly increase your retirement savings without having to sacrifice more of your paycheck.
Setting Retirement Goals
The first step to start saving is understanding your lifestyle, defining your personal goals, and reviewing all of the options you have. Consider the following questions as you begin this journey:
At what age would you want to retire?
What sort of lifestyle would you like during your retirement? Would you rather have a simple, stress-free environment, or something more lavish?
How much income would you need to support your chosen lifestyle?
How much are you able to contribute to your savings each month?
By defining some of your goals, you are better able to determine how much you would need to save and what savings option suits your needs.
Retirement Account Options
There are several different choices you have when it comes to retirement savings accounts, each with different pros and cons:
401(k) or 403(b): These accounts are employer-sponsored, and they allow you to contribute your pre-tax income. Many employers will also make matching contributions, so take advantage of these accounts and find out more about what your workplace does to match contributions.
Traditional IRA: Typically, any contributions made to a traditional IRA (Individual Retirement Account) are tax-deductible. All of your investments would grow tax-deferred until you are ready to withdraw them during retirement.
Roth IRA: Unlike a traditional IRA, contributions made to a Roth IRA account are after-tax income, however your investments are able to grow completely tax-free. Withdrawals during retirement are also tax-free in this account.
SEP IRA & SIMPLE IRA: These savings options are designed for small business owners and individuals who are self-employed. They also offer higher yearly contribution limits than the traditional IRAs.
Retirement Savings Tips
The key to a successful retirement strategy is diversifying your investments. Meaning, try to spread your investments across multiple avenues, such as stocks, bonds, real estate, and more to lower your chance of risk. Additionally, make sure to keep reviewing your strategy often, as many things can change over time. Adjust your contributions and goals as your income and lifestyle changes in the future. Lastly, seek professional advice when needed. A financial advisor can help you maintain a retirement plan suited to your individual needs, so consider having one on your team.
Remember, the sooner you start saving, the more you will have later with less effort. Don't hesitate – start planning your retirement today!
Comentários