Guest Post : By Neda Jafarzadeh,
future, while there are countless uses for your money in the here and now. However, the only way to ensure a comfortable retirement is to start building your savings as soon as possible, no matter how slow that process might be at first. Here are a few things that you need to understand as you begin planning for your retirement:
1. You need to start right now
A journey of a thousand miles begins with a single step, just as the road to retirement starts with a single contribution to a retirement account – followed by countless more, each time you receive a paycheck. Many Americans have the option to contribute to a 401(k) sponsored by their employer, and if you’re one of them, this is one benefit of which you should definitely take advantage. Funds are deducted directly from your wages for effortless saving and employers often offer to match a certain percentage of your contributions. In 2013, the maximum annual contribution allowed for a 401(k) is $175,000.
2. One account likely won’t cut it
If a 401(k) is not an option for you, an Independent Retirement Account (IRA) is going to be your main route to retirement. And if you do have a 401(k), you should still consider opening an IRA as well. Just as you wouldn’t invest all of your money in one stock, you should not bank your entire future on a single retirement account. IRAs are split into two groups, Traditional IRA and Roth IRA – understanding the distinction between them can make all the difference to the individual investor.
Though there are several nuances, the most important difference lies in how your money is taxed – specifically, when it is taxed. Contributions to a Traditional IRA are initially tax-free, allowing you to invest a maximum amount of your funds with taxes taken out when you begin drawing on the account, no sooner than age 60. Conversely, money that you put into a Roth IRA is taxed immediately; once that’s paid however, your money isn’t taxed again. The choice really boils down to whether you expect that during retirement your tax bracket will be lower than the one in which you are currently placed into. All of that said, a mixture of Roth and Traditional IRA accounts is never a bad idea if you want to diversify the tax exposure to your retirement savings.
3. Once you put it away, don’t touch it
After taxes, fees and penalties are the biggest nemesis of your growing retirement savings. The good news though, is that they are relatively easy to avoid: just do nothing. Studies have shown that taking too active a role in managing your retirement investments does nothing to help your funds grow at an accelerated rate; in fact, any benefit to constantly picking and choosing new funds based on the latest research is wiped out by a host of processing, transaction, and maintenance fees. It is also recommended that you choose index funds for your investments and be sure to take a look at the fund’s expense ratio for a better indication of after-fee returns.
Neda Jafarzadeh a financial analyst with NerdWallet Investing. NerdWallet Investing helps investors learn more about how they can manage their money with information like how to rollover 401(k) accounts, and various other investment tips.