The Earlier the Better: Planning for Retirement

It’s never too early to plan for your retirement. In fact, the earlier you start, the better off you’ll be. Let’s talk about a few ways to make the most of your retirement plan!

• Max out your 401(k) match. If your employer matches your contributions to your 401(k), see if you can contribute the maximum amount. Experts recommend contributing 15% of your pre-tax income to your retirement savings, so take advantage of an employer match to help you get there.
• Reduce your debt. By reducing your debt now, it’ll be easier to save money for retirement and live comfortably. Start with the smallest balance, reducing that to zero, then focus on the next lowest. It’ll make you feel good, help create some momentum, and build your confidence to tackle larger debts.
• Diversify your retirement income. Try to have your money come in from multiple sources and which don’t have the same tax on them. For instance, have some money come in from stocks (capital gains tax), some from traditional retirement accounts (regular income tax), and Roth accounts (tax-free withdrawals).
• Build an emergency fund. This will prevent you from tapping into your retirement funds should a crisis occur. You can start with a small amount but try to be consistent about deposits. You’ll soon build a safety net to fall back on when unexpected expenses show up.
• Reduce your cost of living. Look at all your expenses and see if there are ways to reduce or eliminate them. Start with small things, like packing your lunch instead of eating out every day. Then work up to bigger changes, like selling your home and buying smaller one.

Whether you are new to retirement planning or you are looking to learn more, here are a list of helpful retirement planning terms:

401(k): Retirement savings plan funded by employee contributions and, often, by partially matching contributions from the employer. Most 401(k) contributions are made on a tax-deferred basis. Interest, dividends, and capital gains generally accumulate tax-free until you withdraw them.

403(b): Retirement savings plan generally offered by public schools, colleges, and universities, as well as charitable organizations that are tax-exempt under section 501(c)(3). Contributions are tax-deductible, growth is tax-deferred, and you can contribute more per year than you can with an IRA.

Annuity: A contract between a consumer and an insurance company. The consumer invests money with the insurance company in return for a stream of retirement income.

Beneficiary: Someone who benefits by receiving money from an insurance policy, will, or trust fund.

Catch-up provisions: Allow people who are 50 years and older to save additional money in IRAs (individual retirement accounts) and 401(k)s.

Compound interest: Interest calculated not only on the original principal that was saved, but also on the interest earned and left in the account.

Individual retirement account (IRA): A personal savings account that offers the potential for tax-advantaged growth of retirement savings. There are two types: Traditional and Roth. These IRAs have important differences with respect to income limits and tax benefits.

Money market account: A type of savings account that pays a higher rate of return (dividends) than a regular savings account, in return for higher minimum balances and check-writing restrictions.

Pension: A government-approved employee retirement plan offered and funded by the employer.

Roth 401(k): An employer-sponsored investment savings account funded with after-tax money. The account grows tax-free, and the withdrawals of earnings taken in retirement aren’t subject to income tax if you’re at least 59½ years old and have held the account at least five years.

Roth IRA: Retirement savings plan where you make contributions on an after-tax basis, and earnings grow free of federal taxes. This means you don’t get a tax deduction now, but you won’t need to pay taxes on the earnings later.

Share certificate/certificate of deposit (CD): A credit union savings account that will earn dividends at a particular rate if held to maturity. If you withdraw any or all of the principal before maturity, you may have to pay a penalty of a percentage of the amount withdrawn.

Traditional IRA: Retirement savings plan where you may be able to deduct your contributions from your current taxes, and earnings grow tax-deferred until retirement.

To read more about these products and terms, check out the Retirement Plans webpage at irs.gov.

Continue your retirement planning with our Financial Wellness tools.