While most people recognize the importance of saving for retirement, many Americans feel woefully unprepared. According to PwC’s Retirement in America report, 25% of Americans have no retirement savings. And among those aged 60 and over, 13% have nothing saved for retirement. While there may be several factors at play here, a good place to start is making sure we understand some basics, which help us see how simple (and less intimidating).
In this article, we will cover four points: when to start saving, where to save, what to invest in and how much to save.
When to start saving for retirement?
When you analyze the numbers, the power of compound interest and the “time value of money” will certainly show the value of saving early. But everyone is different, and maybe the best approach is to see it in terms of priorities. Obviously, your age and income will dictate your priorities, but a general rule is to “pay yourself first” by eliminating costly debt and making sure you have an emergency fund in place before focusing on the future savings.
First, it often makes more sense to focus on eliminating consumer debt (credit cards, not necessarily your mortgage) before saving for retirement. Not only does this reduce your monthly expenses, but more importantly, it allows you to enter a new phase in your financial life, which is a phase marked by freedom – the freedom to invest, save and give as you can and want to. .
Second, building an emergency fund of around three to six months of living expenses allows you to prepare for unexpected expenses ahead, while minimizing the risk of incurring consumer debt in the future.
Where should you save?
There are a variety of retirement accounts to choose from, the most common being an employer-sponsored 401(k). In 2021, 68% of private sector workers had access to retirement benefits through their employer, according to the US Bureau of Labor Statistics. But for those who aren’t covered by an employer plan or want to save in addition to their retirement plan, there are plenty of other ways to save.
Here are some of the most common options:
401(k). This is the employer-sponsored retirement account. Many companies match the amount you contribute up to a certain limit. Depending on the type of 401(k) you have, you will pay taxes on the money before it enters your account (Roth), or when you withdraw the funds in retirement (called “traditional” or ” before tax”). In 2022, an employee can contribute up to $20,500 to a 401(k), or $27,000 if over age 50.
Traditional IRA. You won’t pay taxes on Individual Retirement Account (IRA) contributions until you withdraw the funds (usually after age 59½ to avoid a penalty). In 2022, you can contribute up to $6,000 to an IRA, or $7,000 if you’re over 50.
Roth IRA. Unlike a traditional IRA, the contributions you make to a Roth IRA are taxed before they enter your account. Therefore, no taxes are deducted when it’s time to start withdrawing your funds. It often makes sense to pay taxes now when the projected tax bracket in retirement may be higher.
SEP IRA or Solo 401(k). Simplified Employee Retirement IRAs and Solo 401(k)s were created to allow small business owners and self-employed people without access to an employer’s 401(k) in a similar way to save for retirement. .
What should you invest in?
Generally speaking, stocks (also called “stocks”) and bonds (often called “fixed income securities”) are the two most common investment options for retirement savings. As with the style of plan you choose, it’s always wise to consult with an expert to find the right mix of investments for you.
Inventory. Purchasing shares allows you to become a shareholder of a company. As a result, you gain or lose money as the value of the company increases or decreases, and many companies pay shareholders a portion of the profits in the form of dividends.
Obligations. Buying bonds is basically lending your money to corporations and governments. Over the term of the loan, you are repaid with interest payments, and when the bond matures, you are repaid the original loan amount.
Mutual funds. Mutual funds take money from a group of people and invest in a collection of stocks, bonds, or other securities. Investing in mutual funds is often an easy way to diversify your investments.
Exchange Traded Funds (ETFs). Like mutual funds, ETFs can be made up of a basket of securities. But unlike mutual funds, ETF prices fluctuate throughout the day and are traded on an exchange like a stock.
How much should you invest?
As with most questions…it depends. But a good starting point is to aim to save about 10-15% of your income for retirement. Depending on your desired spending range, you may need or want more or less than this figure.
As mentioned, each individual’s situation is different. Financial advisors can use a series of calculations to help investors determine how much to save. So it might be a good idea to consult an expert to make sure you’re getting the most out of your money.
With a little homework and some great advice from a professional financial advisor, we hope you’ll understand that saving for retirement doesn’t have to be too complicated or daunting, and you’ll be well on your way to achieving your goal. of retirement.
Hunter Yarbrough, CPA, CFP, is Vice President and Financial Advisor at CapWealth. He is passionate about taking a holistic view of personal finances, including investments, taxes, retirement, education, estate planning and insurance. For more information about Hunter and CapWealth, visit capwealthgroup.com.