Most people cut it too close with their retirement savings; according to the Transamerica Center for Retirement Studies, the median nest egg for a person in their 60s is just $172,000. Such a low amount leaves little room for emergencies and living expenses, let alone something to bring joy in your golden years.
Getting your retirement savings started as soon as possible is vital. Here are three great ways to do that.
Start with the easy money
Your parents or grandparents might have enjoyed a pension for their retirement, but the 401(k) has largely replaced it as the employer-sponsored retirement tool most know today.
Employees can contribute a percentage of their annual pay up to $20,500 of gross income, more if you're older than 50. It comes out of your paycheck before the government withholds payroll taxes, which lowers your taxable income for that year, though you pay taxes later on when you withdraw the money.
However, the best part of a 401(k) plan is the common employer match, where your job matches your contributions up to a percentage of your salary. For example, let's say you make a gross salary of $100,000 and contribute 10% annually, or $10,000. If your employer matches up to 5%, it's contributing an extra $5,000 to your 401(k) plan. That means your annual savings rose 50%; best of all, it's free money! However, you don't get it if you don't participate, so make sure to fund your 401(k) plan, especially if your company matches your contributions.
You must wait until age 59 1/2 to withdraw money from your 401(k) or you'll incur penalties unless you meet certain conditions, so this is a long-term tool for retirement savings.
Now add in some tax savings
Roth IRAs have some great perks; first, you're putting taxed money into the account, so you don't pay taxes when you withdraw it later. In other words, your money is growing tax-free.
Second, the account requires you to wait until age 59 1/2 to withdraw your earnings (unless you meet certain conditions), but you can take out your contributions at any time.
Now, the government knows how sweet of a deal a Roth IRA can be, so they limit your annual contributions to just $6,000 annually, or $7,000 if you're older than 50. Additionally, income limits prevent high earners from utilizing this fantastic and flexible financial tool.
With a dash of flexibility
You can use a standard investment account to fill in the financial gaps of your retirement strategy. Most retirement accounts encourage you to save until your golden years, which is excellent but can limit your financial flexibility when you're younger.
Suppose your retire early; retirement accounts might have rules about how much you can take out, especially if you're doing so before the traditional retirement age -- 59 1/2 for many plans -- with fees and penalties if you break those rules.
A regular investment account has no limits, making it a great option once your retirement accounts are taken care of.
Remember this key point
There isn't an exact plan for the perfect retirement; you must build a strategy around what works best for you. Whatever you do, remember that building your nest egg through multiple types of accounts will give you the ultimate freedom to enjoy your golden years.
Consider the pros and cons of each account type, and you'll build a financial safety net that can work, no matter what life throws at you.