Why and How You Can Prepare for Retirement Decades Ahead
A 2019 survey found that 64% of Americans have very little to no retirement savings at all. When you consider how bills have gone up while wages have stayed the same, it’s not surprising. People barely have disposable income. Why should you worry about something that’s still decades away? Whether you’re planning to stay at an independent living facility or at your family home, there’s always a reason why you should start saving now.
Find out why and how you can prepare for your retirement, even if you’re still in your 20s:
Why You Should Start Saving up Now
Work is physically and mentally exhausting. Even if you enjoy what you do, other factors affect your work life. It can be your boss, co-workers, or even your clients. Now, imagine yourself doing the same thing for decades to come. It’s depressing and discouraging. This is one of the best reasons why you should start saving up as early as possible. The earlier you start building up your retirement savings, the earlier you can retire.
Besides the duration, starting your retirement plan early on affects the amount. This is because of the phenomenon called compound interest. The best part about it is that even your interest earns an interest which hastens the growth of your money. One of the most important factors is time. Even a measly five-year gap can make a large difference when it comes to how long and how much you’ll end up saving.
Another reason why you should start saving ahead of time is financial pressure. If you disregard your finances now, it’ll inevitably catch up to you later in life. A 2019 report found that 135 million Americans are experiencing financial problems. Even if you’re living comfortably right now, that might not always be the case. It’s better to be safe than sorry and start preparing early.
Finances are also easier to manage if you’re accustomed to saving. You can’t teach an old dog new tricks. It’s hard to change your lifestyle after years of the same thing. If you start saving now, you can make it a habit and make it easier for yourself as time goes by.
How You Can Start
The easiest way to begin preparing for your retirement is by signing up for your employer’s 401(k). It can be a way to earn more because a lot of companies offer to match your contribution up to a certain amount. While you may not get the money immediately, you’ll benefit from it later. In a way, it can also reduce the amount of taxes you pay. This is because taxes are calculated after your 401(k) contribution has already been deducted from your salary. So it’ll appear as if your pay is lower than is when you’re really just setting it aside for future use.
The downside is that not all employees are eligible for the plan. Not all businesses offer a 401(k) plan either. But you still have other options.
Simplified Employee Pension (SEP)
If you’re a freelancer or run a small business, signing up for an SEP plan is one of your best bets. It’s cheaper and more flexible than other retirement plans. This is ideal for seasonal businesses. For example, you run a shop in a tourist town. Your cash flow heavily depends on the season and the number of visitors. With an SEP plan, you can increase the contribution if business is going well. You can also decrease the amount if sales are slow. For small business owners, this plan can be costly. Unlike traditional retirement plans, you’re the sole contributor. You also have to contribute the same amount for all employees.
Roth Individual Retirement Account (IRA)
One of the best retirement options is a Roth IRA. It’s more inclusive than other plans because you can get it whether you’re self-employed or not. You can even sign up for one as an additional retirement plan. It’s also more flexible. For example, you have an emergency and need money immediately. You can withdraw your contributions at any time without any penalties. Unlike traditional IRAs, your withdrawals in retirement are tax-free under a Roth IRA.
Of course, it’s not without its disadvantages. Your contributions are calculated after taxes so there aren’t any deductions. If you start earning a certain income, you won’t be allowed to contribute.
The best time to start saving is now. Even if you can only set aside a small amount, it’s always better than nothing. You don’t have to eliminate all your indulgences. You just have to save some money regularly.