It doesn’t matter how old you are, you should be thinking of setting up a retirement fund. “But I’m only 20, shouldn’t I be living for today?” we hear you cry. Sure, you could live for today but you’ll struggle as you’ll get older. If you want to be able to still have a comfortable life once you’ve retired, you need to think ahead. It may sound boring, but we promise it pays off. This guide teaches you everything you need to know about retirement funds and savings.
How much should I save?
How long is a piece of string? The difficulty with this question is that there is no definitive answer. Some financial experts will tell you to put aside 5% of your annual income into a retirement fund. Some will say as much as 20%. It really all depends on how much you’re earning now, what age you want to retire, and how frivolous you want to be when you’re older. There are some basic guidelines available to give you a good idea of how much you should be putting away. Use these to make your own plan that suits your needs.
One of the most common ways of saving for your future is through a 401(k). This is a savings plan that will be sponsored by your employee, making it easy for those who aren’t really sure what they’re doing. A little bit of your paycheck is taken out at the end of each pay period and put into the 401(k). No tax is paid on this until you withdraw the money. Your employer also makes contributions to top up your account. This is one of the most basic ways to save for your retirement, but there are lots of restrictions.
This is another way to put money into your retirement funds, with a little help from your employer. There are certain tax advantages that come with setting up a traditional IRA. Currently, you can contribute a maximum of $5,500 per year into your traditional IRA. This rises to $6,500 if you are over 50 years old. You’ll find that taxes and penalties are smaller on a traditional IRA, and not payable until the money is distributed. Do some research into the pros and cons of a traditional IRA.
Self Directed and Roth IRAS
Some people prefer to go down the Roth IRA route. This is where you contribute to an account with post-tax funds. Everything you then put into your account is tax-free. Self directed IRAs are even better, as they let you invest with the money. You can count real estate and other alternative sources of income as part of your IRA. Setting up your own self directed IRA can be difficult, so make sure you seek expert advice before getting started.
Other Savings Ideas
Of course, there are other ways to save money for your retirement fund. You could set up a high-interest savings account and put a percentage of your savings aside. It’s a good idea to set up an account that has a high yield, which you’re not allowed to touch for a certain amount of years. You could also consider investing in property or the stock market. Although this is risky, you can put your post-tax earnings into a self directed IRA.
The key is to make sure you have lots of different options to save up for your retirement fund. This way you’ll have plenty of revenue coming in when you retire. Enough to do far more than you could when you were 20! Does it seem so silly to save now?