If you don’t want to work yourself to the grave, it’s better to start saving for retirement now. It doesn’t matter if you’re your 25 or 45, the fact remains that the earlier you start saving a portion of your income, the better off you’ll be at retirement. Compound interest is most beneficial when given time to increase and build your wealth. Here are four things you can do to start saving for retirement now and increase your income at retirement.
1. Increase 401k to Capture Employer Match
Many employers offer access to additional benefits beyond your weekly or monthly paycheck. Often a traditional 401k plan is offered to full and part-time employees as long as they are eligible. You can use a portion of your paycheck to contribute to this investment using pre-tax money.
The advantage of making pre-tax contributions means your paycheck will only slightly drop since federal income taxes haven’t been deducted yet. Employers generally will match a specific portion of your 401k contributions, so it’s wise to capture the full offered amount. Sadly, as reported by Forbes, recent studies show that 20% of individuals don’t receive all of a potential match due to the lack of contributions. An employer’s 401k match contribution is free money, so it’s wise to take advantage and not leave it on the table. Dave Ramsey is a celebrity in the financial world and also recommends maxing out your 401(k) plan as a way to save for retirement.
2. Make Roth IRA Contributions
What is a Roth IRA? Well, it is a powerful investment vehicle used to help you build wealth for retirement on a tax-free basis. What does this mean for you? Roth contributions are not taxed inside the Roth account, nor will they be when you begin to withdraw them at retirement. In comparison, traditional IRAs use a tax-deferred model, which means distributions taken during retirement are taxed.
However, the government does put a limit on how much each individual can contribute per year. The most you can set aside per person is $6,000. Yet, if you are over 50, you should take advantage of catch-up contributions. This means you can start adding an extra $1,000 per person per year as long as your household income doesn’t exceed $196,000.
3. Start Investing Now
Let compound interest work for you by starting to save and invest now. Someone who starts saving at 25 is far more likely to retire sooner and have significantly more earnings than someone who doesn’t start investing until 35. In fact, you can contribute less to your 401k when you’re younger and still make more than someone who decides to invest later.
4. Stick to a Budget and Rein in Your Spending
It’s probably a good idea to look at your budget and determine what things you can go without or renegotiate. Use a financial calculator as a helpful tool to determine where your cash is going every month. Can you eat out less or cut back spending money on gas? It may even be a good idea to shop around for better car and health insurance premiums. Documenting your monthly spending will allow your money to work for you, not the other way around. Automating your savings is another way to grow wealth and stick within a budget. It follows the out of sight, out of mind rule. You’re less likely to spend the money if you don’t think it’s available.
If you stick to these four recommendations, you’re more likely to create and build wealth faster. You will be better off saving for retirement now than waiting until you’re older since compound interest grows with time.
Byron Simpson is a qualified business/finance writer expert in investment, debt, credit cards, Passive income, financial updates. He advises in his blog finance cent.