For most people in their 20s and 30s, retirement can feel like it is a lifetime away. It comes as no surprise when most of us think that there will be plenty of time to save for retirement later. However, what most young working adults don’t realize is that having a long timeframe to save for the future is the best advantage one can have to prepare for a comfortable retirement!
In fact, small amounts contributed to a retirement account can grow significantly over the course of a few decades thanks to compound interest. Instead of waiting until it is too late, why not secure the financial future of your golden years while you still can? Here are some useful tips to help you start putting away savings for retirement in 2015.
1. Come up with a Detailed Plan
Deciding to start saving this year is just the beginning of a long financial commitment. The next step is to come up with a detailed plan for retirement. Start the planning process by determining your net worth, which is simply the total value of your assets minus debts. If the difference is a positive number, work out how much of your discretional income you would be willing to put aside for retirement.
Don’t be discouraged if your debts exceed your assets or income. Start from there to figure out what to do to remain with some money for saving.
2. Decide What Kind of Retirement Plan to Invest In
Another important part of the planning process is choosing what type of retirement account to set up. If you are in employment, you can arrange with your employer to make monthly contributions to a traditional 401k or 403b account. Self-employed persons can establish an SEP IRA or solo 401k. Keep in mind that these retirement accounts have their own pros and cons, so make sure to find out which option works best for you.
3. Save Part of Any Extra Income
Whenever you get a windfall of cash through a raise, bonus or tax refund, it is a good habit to save some of the money in your retirement account. The influx of money in your retirement account will reduce owed income tax on a traditional IRA or 401k account.
4. Set up Direct Deposits to Your Retirement Account
By setting up direct deposits to your 401k or IRA when your paycheck comes in, you won’t have to seek the motivation to save. Once the money is in your retirement account, it’s highly unlikely that you will be tempted to withdraw it before it matures, especially since this could result in penalties.
5. Take Advantage of Retirement Saving Tax Breaks
When contributing to an individual retirement plan or employer sponsored pension arrangement, you may be eligible for a tax deduction, tax credit, or other form of retirement savings benefit.
For instance, it is possible to defer paying taxes with an ordinary IRA or 401k until you are able to make withdrawals from the account. Alternatively, you can claim retirement saving tax break plans by prepaying income tax at your current rate with a Roth IRA or 401k, or claiming saver’s tax credit on your retirement account if you happen to be a low to moderate income-earner.
6. Reduce Investment Fees
Investment fees can eat up a huge chunk of your retirement savings, but they are a necessary step towards securing your future. It pays to look around for a custodian that charges fewer fees to maintain your retirement account without compromising on quality of service.
Most retirement financial planners charge an annual fee for their services, but some may also charge extra fees for each transaction made on a retirement account. Make sure to familiarize yourself with the fees of a financial custodian before signing up for any services.
However, don’t go overboard when trying to cut down on investment fees either. When you hire the services of a professional, part of what you pay for also includes financial advice on setting up and managing your investment, making the best decisions for tax breaks and other benefits that you may not be able to figure out on your own!