Saving for retirement is one of the most important ways that you can prepare for your financial future. When you stop working, nearly all of your income dries up. Although you may qualify to receive Social Security benefits, they'll only go partway toward replacing the income that your job paid you. Relying too much on Social Security can be a huge mistake that will leave you struggling to make ends meet after you retire.
It's therefore important to use other methods of saving for retirement to supplement Social Security. However, there are many different types of accounts you can use, and so it can be hard to figure out which one makes the most sense. The answer differs depending on your situation, but there are some general rules that you can follow to see which strategy is best for you.
The typical worker: Get your 401(k) match first
Not everyone has access to a 401(k) or similar retirement plan at work, and among those who do, not every employer offers matching contributions when you take money out of your own paycheck to put it in a 401(k). But for those who are fortunate enough to work for someone willing to make 401(k) matching contributions on your behalf, it's almost always the best move to contribute enough to the 401(k) to claim that match in full.
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How much money that'll take depends on the specifics of your employer's plan. Matching provisions can vary, although the most common involves matching either 50% or 100% of employee contributions up to 6% of salary. If you can afford to make that large a contribution, then the extra money your employer puts into your account can as much as double the size of your 401(k) when you retire. Bear in mind, though, that matching contributions typically require you to keep working for your employer for a certain length of time before they vest, and if you leave beforehand, you might have to give them back. Nevertheless, for those who expect to stay with their employer for the indefinite future, the 401(k) match is a great place to start.
Low-income workers: Go with a Roth
Many people use retirement contributions to save on their taxes. However, if you don't make that much money, then your tax rate right now is probably extremely low. That makes the value of making a deductible contribution to a traditional IRA or 401(k) account much less than it'd be for a higher-income individual.
Instead, those in low tax brackets should consider prioritizing a Roth IRA contribution. You won't get an upfront deduction on your taxes for contributing to a Roth, but you will get tax-free treatment not only while the money is in your retirement account but also when you make withdrawals later on. Using a Roth essentially locks in your current low tax rate, and that's a smart thing to do when that rate happens to be extremely low.
For parents: Pick retirement over college
Parents often face a challenging situation: Should they contribute to college savings accounts for their kids or for their own retirement? The best answer is usually to stick with your retirement, for several reasons.
First, money in retirement accounts typically gets excluded from assets for financial aid purposes, while money in college savings accounts often gets treated as either the child's assets or the parents' assets. That can mean less in financial aid if you save for college first.
Perhaps more importantly, kids have other means to get money to spend on education, including student loans. By contrast, there aren't any other sources of money for you to save for retirement. Most parents would prefer to pay for their children's education without forcing them to borrow. But if the alternative is putting your own retirement at risk and therefore potentially becoming a financial burden on your children later on, then those kids will appreciate your putting yourself first.
Be smart about retirement
It's tough to save for retirement, but you have a lot of tools at your disposal. By putting them to the best use, you'll arrive at the end of your career with a great chance of achieving the financial security you need to live a happy retirement.
