Hopefully you are in a position to be saving for your retirement. If not, I encourage you to explore the options available to you. Real quick, if you don’t have a 401(k) available, here are some starting points. If you are ready to get to that annual limit year after year, it’s important to understand how to correctly allocate your money so that you don’t hit the cap too soon. You could risk losing your employer match money if you do. So if you’re ready to calculate the right contribution amount to get you to the annual limit, feel free to skip ahead.
Create an Individual Retirement Account (IRA)
After establishing an emergency fund (approximately 6-12 months of income, depending on how variable your income and job are), creating an IRA is a first step. IRAs can be either “traditional” (pre-tax) or Roth (post-tax). As it is suggested, money taken into traditional IRAs is prior to tax deductions, instead paying taxes when you withdraw the money. Roth funds are taken after taxes, so withdrawing those funds are tax-free. The typical way to determine which is better for you is based on your income. If you see yourself in a low tax bracket now with opportunity to get into a higher bracket in the future, I would explore a Roth IRA. If you are already in a mid or high tax bracket, the traditional IRA is likely a better solution. Either way, you are limited by law to how much you can invest — $5,500 per year, with a “catch-up” bump to $6,500 once you turn 50. If you are looking to start small, consider a MyRA, a Roth IRA solution which can be opened with as little as $2.
There are some other companies that can help you save for retirement too, like acorns. Certainly not the only service, but acorns allows you to start building a Roth IRA with the option to roundup your purchases, use recurring bank payments, and more. Click the photo below to be taken to their website. If you sign up with the referral link, you will get $5 free after investing in a new account.
Make the most of your Health Savings Account (HSA)
If your employer does not offer a 401(k) plan, there is a chance that you’re on your own for health insurance too. But if you go with a high-deductible plan, you are eligible for a health savings account (HSA). Unlike a flexible spending account (FSA), the HSA funds do not expire, so you can save money now and use it in retirement if you wanted. Contributions to HSAs are pre-tax and you can invest it through your HSA, although most have a minimum account balance before you can start investing (~$1,000). If it is invested, the money grows tax-free and then when you use it, you don’t get taxed on it as long as it is used to pay medical expenses.
Maximizing Your 401(k)
Unfortunately in the US, most people have less than $1,000 in their bank account, according to a 2016 survey by GOBankingRates. While no solution fits everyone, there is a general rule of thumb for how much money you should have invested for retirement by age. These rules were first published by Fidelity Investments, but it’s best to work with your financial adviser to make sure that you are on track to hit your personal goals.
The rule of thumb on how much money to have accumulated for retirement goes as follows:
In your 20’s: Save as much as you can. Shoot for 25% of your gross pay to be the sum of your 401(k) contribution, employer matching funds, and debt repayment.
By 30: The rule of thumb here is that you have your annual salary covered in savings by 30.
By 35: 2x salary saved.
By 40: 3x salary saved.
By 45: 4x salary saved.
By 50: 5x salary saved.
By 55: 6x salary saved.
By 60: 7x salary saved.
By 65: 8x salary saved.
Determine Your 401(k) Contribution
You can figure out how much you should be contributing to hit your maximum contribution limit by filling out the form below. In 2018, the contribution limits increased by $500 to $18,500 and $24,500 if you are 50 or older. Don’t forget that this number will change if you get a salary increase, bonus, or profit sharing, so it’s worth checking in on a few times a year. I try to also mention each time that I write anything about retirement investing, remember to update your beneficiary!! The money in your 401(k) is passed along outside standard probate unless you don’t name a beneficiary. If you don’t leave a beneficiary, your funds will pass through the probate process, which can delay and reduce the value of your fund due to taxation and other fees. Best of luck in your savings adventure!
