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Retirement may be decades away, but there are many reasons to think about contributing to a retirement plan early on. Here are some tips to make the most of your retirement planning.
1. Starting early pays off
Early investors can make the most of their money because their investments will have more time to compound.
You will likely make more money when you get older, but it’s tough to beat the kinds of compounded returns that only time can give you. It’s especially tough to catch up if you have little or no retirement savings when you're in your 40s or 50s.
2. Know the lingo
401(k)? 403(b)? IRA? Roth IRA? Know what options your employer offers, and pay particular attention to the tax implications. Most retirement plans allow you to contribute pre-tax. You’ll then be taxed on your savings when you withdraw the funds after retiring.
Roth individual retirement accounts require you to pay income taxes on what you contribute now, but the distributions are tax-free when you retire. What makes the most sense depends on your tax brackets now and in the future. You should make sure you’re clear on the tax implications of whatever plan you choose, and you might choose to have a mix of both pre-tax and after-tax retirement accounts to diversify your savings.
3. Max out the match
Many employers offer to match a set percentage of their employees’ retirement contributions — say, 50% of up to 5% of your pre-tax income. In this case, your employer chips in on top of your contribution. Just make sure you know how long you need to stay at your job before you’re “vested” in the match. In other words, when your employer’s contributions are all yours if you switch companies or careers.
4. Don’t wait for a company plan
Even if you’re working only part-time or you’re self-employed, you can still put away money in an IRA. In fact, self-employed individuals may be able to save more money in certain accounts than their peers with an employer-sponsored retirement plan.
5. Find ways to save more
Rent, car payments, student loans, groceries and entertainment — the never-ending list of expenses always makes it hard to put aside cash for the future. The beauty of many retirement plans is your contributions are automatically deducted, so you can force yourself to save before you even receive your paycheck. But how do you get yourself to save more? One popular strategy involves increasing your contributions every time you get a raise or bonus. The end result? No net change in your paycheck and more money put aside for retirement.
6. Avoid early withdrawals
Later in life you may have large expenses such as mortgage payments and college tuition that may tempt you to withdraw or borrow money from your retirement plan. Keep in mind you will pay a significant penalty on early withdrawals. If you do find that you’re in need of some extra liquid cash, you may have the ability to lower your contributions and then increase them later if needed.
One way to preserve your retirement nest egg is to make sure you’re also saving for other life goals and emergencies. After setting up a bank account to save for the future and getting started with retirement savings, consider working with a financial professional or look to Nationwide to find an investment professional today.
Neither Nationwide nor our representatives give legal or tax advice. Please consult your attorney, legal or tax advisor about such questions.