You'll probably need more money than your Social Security benefits to maintain a comfortable lifestyle in retirement. Those benefits will only replace about 40% of your pre-retirement income if you're an average earner, and most seniors need access to a lot more money than that. That's where your personal savings come in.
Many people have access to a 401(k) plan through their jobs. But if you don't, worry not -- you can do quite well for yourself saving for your senior years in an IRA. And these moves could really set you up to enjoy retirement to the fullest.
1. Starting one at a young age
Many people wait until their 30s or 40s (or beyond) to start saving for retirement. But that's a mistake.
When it comes to growing wealth for retirement, time is your greatest weapon. And the longer you wait to open an IRA, the more you'll put yourself at a disadvantage.
Say you're able to save $500 every month in your IRA. Let's also assume you invest your IRA so it delivers an average annual 7% return (we'll dive into that in a bit). If you save that $500 a month between the ages of 27 and 67, you'll end up with about $1.2 million. Wait 10 years to start saving, and you'll wind up with $567,000 instead -- less than half.
2. Investing in stocks
Putting money into the stock market carries risk. But so does investing too conservatively.
If you load your IRA with bonds, you may end up disappointed with the returns they deliver. On the other hand, if you go heavy on stocks, you might easily score an average annual 7% return like we just used in our example, since that's a few percentage points below the stock market's average.
So what might happen if you play it too safe? Say your IRA only delivers an average annual 4% return and you sock away that $500 a month for 40 years. Instead of ending up with around $1.2 million, you'll be sitting on $570,000 instead.
3. Saving in a Roth account
When you put money into a traditional IRA, your contributions are tax-free, which means you get to enjoy an immediate tax break on them. However, you'll then need to pay taxes on your IRA withdrawals during retirement, and that could prove quite burdensome at a time when you're on a fixed income.
That's why Roth IRAs are so valuable. Though you won't get an immediate tax break by funding a Roth, your withdrawals in retirement will be yours to enjoy tax-free.
Plus, Roth IRAs are the only tax-advantaged retirement plan to not impose required minimum distributions (RMDs). Some seniors don't mind RMDs because they need to continuously tap their savings to pay the bills. But if your goal is to leave the bulk of your IRA behind to your heirs, then a Roth IRA is your best bet.
An IRA could help you manage your expenses with ease in retirement and really enjoy that stage of life. Employ these tactics so you can make the most of your account.