While most workers are responsible for their own retirement savings these days, high schools don’t have required classes on 401(k)’s and Individual Retirement Accounts (I.R.A.s). And colleges usually don’t teach anything about Roth I.R.A.s or 403(b)’s. That’s where we come in. Here is what you need to know about saving for life after you stop working and getting on the path toward a comfortable retirement, no matter your career or the size of your paycheck.
The best day to start saving is today, even if you can save only a little bit.
The most important advice about saving for retirement is this: Start now. Why? Two reasons:
1.The magic of compound interest. You’ve probably read about this before, but the best way to understand it is to see it in front of you.
Yes, we did that math correctly. If two people put the same amount of money away each year ($5,000), earn the same return on their investments (6 percent annually) and stop saving upon retirement at the same age (67), one will end up with nearly twice as much money just by starting at 22 instead of 32. Put another way: The investor who started saving 10 years earlier would have about $500,000 more at retirement. It’s that simple.
- Saving is a habit. It may make rational, mathematical sense to start saving early, but it isn’t always easy. But the instinct to save grows as you do it. It’ll start to feel good as you see that account balance grow.
HOW MUCH SHOULD YOU SAVE?
The short answer: As much as you reasonably can, says Carl Richards, our Sketch Guy columnist. Sure, you’ll see articles telling you to save at least 15 percent of your income; that’s a fine benchmark, though the true number will depend on how long you hope to work, what kind of inheritance you may get and a bunch of other unknowable facts. So start with something, even if it’s just $25 per paycheck. Then, try to save a little bit more each year. Do it early and often enough so that saving becomes second nature.
The lineup of retirement accounts is a giant bowl of alphabet soup: 401(k)’s, 403(b)’s, 457s, I.R.A.s, Roth I.R.A.s, Solo 401(k)’s and all the rest. They came into existence over the decades for specific reasons, designed to help people who couldn’t get all the benefits of the other accounts. But the result is a system that leaves many confused.
The first thing you need to know is that your account options will depend in large part on where and how you work.
IF YOU WORK AT A FOR-PROFIT EMPLOYER
Available account: 401(k) plan.
If your for-profit employer offers any workplace retirement savings plan, it’s probably a 401(k). (Many smaller employers do not.) You can generally sign up for this any time (not just during your first week on the job or during specific periods each year). All you have to do is fill out a form saying what percentage of your paycheck you want to save, and your employer will deposit that amount with a company (like Fidelity or Vanguard) that will hold it for you. Here, automation is your friend. Some employers will automatically raise your savings rate each year, if you let them. And you should.
Things to Know About a 401(k)
Matching: If you’re really lucky, your employer will match some of your savings. It may match everything you save, up to 3 percent of your salary. Or it may put in 50 cents for every dollar you save, up to 6 percent of your salary. Whatever the offer is, do whatever you can to get all of that free money. It’s like getting an instant raise, one that will pay you even more over time thanks to the compound interest we were talking about before.
Caps: How much can you put aside in a 401(k)? The federal government makes the call on this, and it often goes up a bit each year. You can find the latest numbers here.
Taxes: As with most other employer-based plans, when you save in a 401(k) you don’t pay income taxes on the money you set aside, though you’ll have to pay taxes when you eventually take out the money.
IF YOU WORK AT A NONPROFIT EMPLOYER
Available accounts: 401(k), 403(b) and 457 plans.
If you work for the government or for a nonprofit institution like a school, religious organization or a charity, you likely have different options.
What to Know About a 457 plan: These are a lot like 401(k)’s, so read the section above to understand them better.
What to Know About a 403(b) plan: These frequently show up at nonprofits – 401(k)’s are more rare here – and often get complicated and expensive. You may be encouraged (or forced) to put your money into an annuity instead of a mutual fund, which is what 401(k) plans invest in. (More on mutual funds later.) Annuities technically are insurance products, and they are very difficult even for professionals to decipher. Which brings us to the expensive part: They often have very high fees.
In some instances, especially if your employer is not matching your contribution, you may want to skip using 403(b)’s altogether and instead use the I.R.A.s we discuss below.