How to save for retirement
Everyone’s financial situation is unique. Some may start saving for retirement early on, while others have had to play catch up after a late start. One thing that everyone should do is diversify the types of accounts you save and invest in, so you can maximize your tax situation in the future.
Here are three buckets to consider when saving for retirement.
Contribute to a 401(k).
The tried and true standby, investing through an employer sponsored retirement plan like a 401(k) is a great foundation for your retirement savings. Especially if your employer offers a match, contribute at least the percentage of what your company is willing to put into your 401(k) to avoid leaving money on the table.
Additionally, find ways to boost your contributions. Any time you have more income coming in than you normally do – let’s say when you get a bonus or a raise – use that to increase your contributions when possible. And if you’re 50 and older, try to take advantage of increased “catch-up contributions” to your 401(k) or IRA. If you can set the money aside before it hits your bank account, it’s less likely you’ll miss it.
Contribute to a Roth account.
Aside from a traditional 401(k), depending on your income level, also look into either a Roth 401(k) or Roth IRA. A Roth 401(k) is likely another option offered by your employer, and technically you can invest in both types of 401(k)s at the same time. A Roth IRA, on the other hand, is an individual retirement account that you can set up on your own or with the guidance of a financial professional.
Both a Roth 401(k) and a Roth IRAs offer potential tax benefits, because your contributions are taxed now instead of when you ultimately withdraw funds. This means that when you need to access your funds during retirement, everything in your Roth account is yours, tax-free.
A Roth account can maximize your tax situation in retirement, especially if you expect to be in a higher tax bracket in the future. While much of what you save for retirement each year can be funneled into your traditional 401(k), you may want to consider putting at least 1–5% of that into a Roth account.
Take advantage of an HSA.
An avenue that many people overlook when it comes to retirement savings is an HSA (Health Savings Account). Healthcare is typically one of the biggest expenses in retirement, and while Medicare provides basic coverage for most retirees, it isn’t free and it doesn’t cover everything.
An HSA is the only account with both tax-free contributions and withdrawals. If you have a high-deductible health plan, an HSA can help you accumulate savings while you’re still working and provide a source of healthcare funds in retirement. While you can no longer make contributions to an HSA once you enroll in Medicare, you can use the funds to cover insurance premiums and other out-of-pocket expenses. Plus, you can use it to help offset the costs of long-term care, which nearly 70% of Americans will need at some point in their lives.
Retirement planning can feel overwhelming, but it’s never too late to formulate a plan that considers the lifestyle you hope to achieve, your specific financial situation and what works best for your budget. With a little forethought and a realistic retirement strategy, you can achieve a retirement that fulfills your expectations and delivers financial peace of mind.
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