This week is National Retirement Security Week, which encourages a focus on increasing retirement savings, expanding financial literacy, and improving the retirement security of all people in the United States. Saving to reach your financial goals is important, and saving adequately for a happy, safe, and healthy retirement should be one of those goals regardless of whether you’re new to the job market or have built a successful career. 

However, understanding how to save for retirement can be intimidating – many people put it off because they don’t know where to start.  

Why Is Saving for Retirement Important? 

Most of us probably understand the general idea that putting money away for retirement is important. However, it’s also important to understand some of the details on why or how saving for retirement really benefits you long-term. According to Investopedia, here are a few reasons why saving for retirement should be a priority: 

Social Security 

If you paid Social Security taxes for at least 10 years by the time you retire, Social Security benefits will likely make up a portion of your retiree income, but they aren’t guaranteed and are likely not enough to live off of on their own.  

Tax Benefits 

If you aren’t saving for retirement, you may be missing out on tax benefits. 

According to MassMutual, when money is withheld from your paycheck and placed directly into a traditional 401(k), 403(b), self-employed retirement account, or IRA, those funds don’t get taxed, saving you money on taxes for that year.  

You will have to pay taxes on the money when you pull it out in retirement, but the hope is that you will be in a lower tax bracket at that point or can do some tax planning to minimize your tax bill. 

Compounding Returns 

The earlier you save for retirement, the sooner you can capitalize on the effects of compounding returns. 

Retirement accounts benefit from compound interest, which means the money you put in grows at a set rate each year (conservatively estimated at around 8%). The math works out such that if you invest $475 per month starting at age 22 with an annualized return of 8%, by the time you are ready to retire at age 67, you will have put in $256,500 into your retirement account, but that account will have grown to $2,379,328 because of the compounding returns.  

Part of this depends on how you’re allocating your accounts, but we’ll get into that later in this post. If you’re thinking to yourself, “Well, I’m already way past 22,” that’s okay! It’s never too late to get started, and you can choose to invest more aggressively into your account now, if you'd like to. 

Getting Started 

Does your employer offer retirement benefits? 

First things first – if you work for a company that offers benefits, figure out if retirement is one of those benefits. If so, what does it include? If you’re not taking advantage of these benefits, you are leaving money on the table, so it’s important to understand what is available to you.  

If your employer does offer retirement plans, they are most likely a 401(k) or 403(b) plan. In this post, that is what we will be focusing on, but if you have another type of employer-sponsored retirement plan, check out this article from Paychex to get a better understanding of what your plan entails.  

Take advantage of employer-matching and contributions 

If you have retirement benefits, they most likely involve a contribution match or some other kind of contribution incentive. A straightforward match usually involves your employer putting the same amount of money into your 401(k) plan that you do (or they may only match a portion of your contribution), up to a maximum percentage  

However, sometimes there are contingencies around this – they might only contribute to your account if you put in a certain percentage (i.e. they will contribute 3%, but only if you also put in a full 3% - they won’t match or contribute if you put less in) or if you work there for a certain amount of time (i.e. they will match at 4%, but you only get access to that that accumulated money if you stay at the company for at least 2 years).  

Any benefits that involve matching contributions are definitely worth taking advantage of. Over time, matches can really add up and provide huge value to your retirement savings as your account grows. If possible, adjust your retirement contributions to align with the maximum your employer is willing to match and take any other necessary steps to access retirement benefits. 

What if my employer doesn’t offer a retirement plan or benefits? 

If you are self-employed or if your employer doesn’t offer a retirement plan, open an individual retirement account (IRA) with your financial institution. Self-Help offers Traditional and Roth IRAs and you can open a term certificate within your IRA – reach out to your tax advisor to determine what is right for you. 

Should I contribute to a Roth or traditional retirement account? 

The main difference between Roth and traditional retirement accounts is when you will pay taxes on the money that is contributed to the account.  

With a Roth account, you are contributing to the account with after-tax dollars, meaning you have already paid taxes on the money you are putting in. With this type of account, when you withdraw from the account in retirement, you will not owe additional taxes. 

A traditional account uses pre-tax contributions. This means that these contributions can be deducted from your taxable income for the year, offering tax benefits in the short term. However, when you withdraw money from the account in retirement, you will owe taxes on those funds. 

Some other differences include early withdrawals (which we’ll get into later on in this post) and minimum distributions. With traditional retirement accounts, you must start taking required minimum distributions by a certain age (age 73 if you were born before or in 1959, age 75 if you were born in 1960 or later). There are no minimum distributions for Roth accounts. This means you can leave all your money in the account to continue to grow for as long as you’d like. 

The contributions you choose to make are entirely up to your preferences, as both options offer tax benefits. Here are the thought processes that are common when deciding what accounts to contribute to: 

• Roth: Some people prefer to make Roth contributions because there is uncertainty around what the tax brackets will be by the time they are ready for retirement and feel that Roth allows for more assurance.  
• Traditional: Others prefer to take advantage of the current year’s tax benefits by making traditional contributions. This might be particularly beneficial if you either have higher expenses and could benefit from reduced taxes now or if you are in a high tax bracket currently and expect to be in a lower tax bracket in retirement.  
• Mix: Some prefer to split their contributions between the two types of accounts, so they can take some advantage of tax benefits now while also managing the taxes they will owe in retirement. 

How much should I be contributing? 

Make sure you are contributing to your 401(k) or IRA as a percentage of your income, which, assuming you get annual cost-of-living adjustments or raises, will help automatically adjust the amount you're saving to keep up with inflation. 

As mentioned, you should at least be contributing enough to take full advantage of any employer matching benefits that your company may offer. However, if you are able, Investopedia suggests contributing at least 10% of your pay to your retirement account, and more toward 15% or even 20% if you can afford to do so.  

This may depend on when you start contributing and what your retirement goals are. Most people can live off of 80% of their pre-retirement income once they head into retirement, but this may depend on your lifestyle and plans for retirement. Taking these factors into account may help you determine how much to put away now. For instance, if you are in your 20s, contributing 10% each month could be enough for a decent nest egg. If you’re older or plan to live more actively in retirement, you may want to consider investing more toward 15-20% if you are able. 

If you want to figure out more specifically what you might need to have saved by the time retirement rolls around, Forbes suggests the  25x rule. This means that you take the annual budget you expect to live on in retirement and multiply that by 25 to know how much you need saved for retirement. Then, once you reach retirement, you should follow the 4% rule – this means you withdraw only 4% of your retirement fund each year to live off, and, because of continued investment returns, your money should last you for the entirety of your retirement.  

As you determine what contributions to make, here are a few things to keep in mind: 

• IRA contribution limits: For 2024, the contribution limit for all IRAs is $7,000 ($8,000 if age 50 or older), regardless of how you spread your money between Roth or traditional IRAs. 
• 401(k) contribution limits: For 2024, the contribution limit for all 401(k) plans is $23,000 ($30,500 if age 50 or older), regardless of how you spread your money between Roth or traditional 401(k) accounts. 
• Income restrictions: With IRAs, there are some restrictions based on your income. For 2024, you can only make a partial contribution to your Roth IRA if your income is above $146k ($230k for married filing jointly) and you cannot make any Roth IRA contributions if your income is above $161k ($240k for married filing jointly). 
  • There are no income restrictions for 401(k) plans. 

Invest your retirement account 

Make sure your 401(k) and IRA are properly invested. While the idea of investing this account might seem risky to some people, you’ll actually lose money if you don’t because the value of our money tends to go down over time due to inflation.  

Most of the time, employer-sponsored 401(k) plans are automatically invested into a basic mutual fund, but there is usually a small selection of different kinds of mutual funds that you can choose from. According to NerdWallet, there is usually at least one option in each of the following categories:  

• U.S. large cap (shares of the largest U.S. companies) 
• U.S. small cap (on the other end - companies with small market capitalization) 
• International 
• Emerging markets 
• Alternatives like natural resources or real estate 

They suggest diversifying your portfolio by spreading your contributions among these funds. NerdWallet gives one example for how you might want to diversify: 50% in U.S. large cap fund, 30% in an international fund, 10% in U.S. small cap fund, and spread the remaining 10% among categories like emerging markets and natural resources. 

When choosing funds, it’s important to keep expense ratios in mind. Expense ratios are fees carried by the investments – if you have a choice between different funds, make sure to choose funds with the lowest fees. 

If making all these selections seems like a lot, you can also invest your money in a target date fund, if available – these funds correspond to the year you plan to retire. You can put all your money in this fund, and it is diversified for you. This option usually results in higher fees because the funds are actively managed, so make sure you understand what those fees are to determine whether they are worth it. For some, this option still may be worth it even with the fees because it eases some of the overwhelm of having to make fund selections. 

Early Withdrawals 

While you should do anything you can to avoid making early withdrawals from your retirement accounts, sometimes unexpected large expenses can come up that might leave you feeling like you have no other option.  

If you need to make early withdrawals, Roth accounts are more flexible because they allow your original contributions to be withdrawn at any time. However, if you try to withdraw the growth on those contributions, that comes with a 10% fee. Withdrawing from traditional accounts comes with more penalties – a 10% fee, and you will have to pay taxes at your current tax rate on those funds. Either way, you will be missing out on the growth that is intended as a huge benefit of retirement accounts.  

Instead of making early withdrawals, consider a loan against your retirement account. This allows you to borrow money from your retirement savings and pay it back to yourself over time, with interest. The loan payment and interest go back into your account, so you can avoid the hefty fees and reduced assets that would come from an early withdrawal. 

Seek Support from a Professional 

The world of finances can be confusing! If you’re feeling overwhelmed, rest assured that there are plenty of resources that can provide support. Financial advisors can invest your funds for you or provide guidance based on your unique situation.  

At Self-Help, we offer  free financial coaching to members. While we can’t offer specific retirement support, we can help you create spending plans and achieve your saving goals to get you on the path to a successful retirement in the future.  

Save as Soon as You Are Able 

However you decide to allocate your assets, remember that it’s never too early to start saving for retirement (and it’s also never too late). Even if you can only afford to put away a small percentage of your income, it will still benefit you in the long run.  

Happy National Retirement Security Week!