Saving for retirement is like establishing a good habit — it’s difficult to get started but changes your life for the better each day. Forming bad habits is easy but good habits take time, patience, and determination to see through.
Here at Retire To, we love to help you form good habits that last to and through retirement. It is our goal to empower you to create the retirement you have always dreamed of.
How can you make saving for retirement a habit you actually stick to? Below are three easy ways to get you started on your savings journey.
#1: Use Your Workplace Retirement Account
Your workplace retirement account is the best place to get started saving for retirement. For you, this could be a 401(k), 403(b), or 457(b). This is a great account because it allows you to select a percentage of your paycheck to funnel directly into your account each time you get paid. By automating the contributions, you ensure that the money in your account is growing each month, adding momentum and motivation in your savings journey.
Your contributions are made with before-tax dollars meaning that you don’t pay taxes on the money you put into the account up front, but will pay taxes on the distributions you take in retirement. For 2019, the contribution limit for a qualified workplace account is $19,000, this is an increase from $18,000 last year. It is important to contribute as much as possible to keep yourself on track.
Many companies also offer an employer match, meaning that they will add a specified amount to your retirement plan each month as long as you meet the contribution threshold. If you aren’t putting money into your account, your employer won’t put money into the account.
Most employers set it as a 3-6% match program. Be sure you check what the stipulations are like for your company because you want to ensure you are contributing enough to qualify for the employer match. If you don’t take part in this, then you are leaving a lot of money on the table and in the world of retirement savings, every penny counts.
Open An IRA
An Individual Retirement Account (IRA) can be a wonderful addition to your savings strategy. This account type can be used to complement your 401(k) while giving you more flexibility and freedom in investment options. Quite often, your 401(k) investment options are limited, and an IRA can provide you with more options to control where your investments go.
While your investment options grow, with an IRA your contribution limit decreases. The IRS allows you to contribute a maximum of $6,000 per year, increasing from $5,500 previously. If you are 50 or over you can contribute an additional $1,000 per year.
While there are many different types of IRAs, the two main types are:
- Traditional IRA
- Roth IRA
A Traditional IRA operates most similar to your 401(k). You contribute before-tax dollars and aren’t required to pay taxes until distributions in retirement. By contributing to both a 401(k) and Traditional IRA, you are lowering your taxable income which can be quite helpful come tax time. Contributing to these accounts, therefore, increases your retirement savings while also improving your tax planning strategy.
A Roth IRA differs from a Traditional IRA in that you contribute to the fund with after-tax dollars. So you pay taxes on the money before you contribute. The benefit of this structure is since you pay taxes upon contribution, you don’t pay them when you withdraw. This is quite helpful when managing your tax bill in retirement.
As we have discussed, all of these accounts have contribution limits but a Roth IRA is the only account that also has income limits. This means that if you make more than the income thresholds you aren’t able to contribute money into a Roth IRA. For 2019, if you are filing taxes as single the limit is $137,000 and if you are married and filing jointly the limit is $203,000. Understanding these limits will help you plan for the most effective way to save for retirement.
Your Health Savings Account Matters
According to a study by Fidelity, retirees today can expect to pay at least $285,000 in medical expenses. The cost of medical procedures, recovery, home care, medication, etc. only continues to rise and eats up more money than retirees expect. Planning for this expense is the best way to prepare. One way to do this is to make the most of your Health Savings Account (HSA).
An HSA often accompanies high deductible healthcare plans and are a great way to save for future medical needs. You contribute before-tax dollars to the account, the money grows in the account tax-free, and if used for medical expenses remains tax-free. With the number of tax benefits this account has, it’s important to make the most of it. Another great factor about health savings accounts is that the money remains in the account and rolls over each year, giving you the flexibility to use it when you need it.
Saving for retirement is hard, but with the right advice and a strong plan, you’ll set yourself up to have enough money to retire to a lifestyle you love. We love helping people reach the retirement of their dreams. To do that, we create customized plans and specialized advice for each client we work with. Interested in how you can get a customized savings plan? Schedule a call with us! We can’t wait to hear from you.