7 Reasons Why You Should Start Thinking About Retirement Now
So, you’ve been at your new job for a couple of days and your HR manager is telling you about 401(k) options, life insurance, and all kinds of things that you don’t feel concern you at the moment. While retirement is likely decades away and one of the furthest things from your mind, I’m here to tell you why you should give the idea some attention now and start planning for the future.
Contributions to Your Fund Are Limited
If you haven’t looked much into what a retirement savings account is, there’s a lot that you might not know about where you’re putting your money. This includes both employer-sponsored accounts like a 401(k) or an individual account like an IRA. Starting in 2021, you can contribute a maximum of $19,500 to your 401(k). The IRS allows you to contribute $6,000 to your traditional or Roth IRA.
No matter what kind of retirement account that you’re considering, there are limits to the amount of money that you can contribute each year. This is because the IRS does not tax what you’ve contributed. For example, even if you want to contribute 20% of your $100,000 salary each year, you will be able to put $19,500 into your account. Should you decide that you want to contribute more, you will have to open an additional account like an IRA to take on the remainder of your contributions.
401(k) Matching=Free Money
Many employers offer a 401(k) matching program to encourage employee longevity. This means that they’ll match your annual contributions up to a certain percentage of your salary. The amount that your employer contributes comes at no extra cost to you and is simply free money. Take advantage of this as long as you can and you’re doubling the amount of money you put into your 401(k) each year. This also makes it much easier to reach the maximum allowable threshold.
Interest Builds Over Time
A 401(k) is more than a traditional savings account. The funds that you put into your account will be diversified and put into stocks, bonds, and cash investments. Most accounts will return interest at a rate between 3% and 8%. While this might not sound like much, the longer you have your money in the account the faster it will grow. Your interest will compound year over year and grow faster than you can contribute to it.
Social Security is Not Guaranteed
Yes, every paycheck you get, you’re contributing to Social Security. Yes, you should be getting Social Security payouts after you become eligible and make the decision to start drawing. However, the current Social Security reserves are scheduled to run out by 2034. While people will continue to contribute to this by paying taxes just like you, it’s predicted that it won’t be enough to cover the full amount of benefits for retirees.
What does this mean for you? It means that if you want to retire, you need to make sure that your retirement fund will support you without Social Security. Don’t count on a monthly payout that not only might not be available but won’t be significant if it is.
Avoid Catch-Up Contributions
It was previously mentioned that you can only contribute a specified amount to your retirement fund each year. Fortunately, after the age of 50, you’re allowed to put additional funds into your account as “catch-up contributions.” This amount was raised to $6,500 each year in 2021. This is nice to have as it allows you to put extra money in your retirement account, but it’s also money that you would probably like to have around each year. You can avoid having to do this by starting your 401(k) or IRA contributions early.
Build a More Comfortable Retirement Fund
It’s simple math that the longer you contribute to your retirement fund, the more money you’ll have in it when you get there. You’ll be able to retire more comfortably and do the things that you want to do. If this means traveling the world or playing six rounds of golf each week, you’re more likely to achieve that dream if you start building your retirement nest egg early.
Know Your Options
When you’re thinking about retirement, it’s good to know your options. Know whether you’re going to contribute to a 401(k) or IRA for the entirety of your career, if you’re going to have to continue to work, or if you should seek alternate methods of income. Working a part-time job or renting out a room are common ways seniors make money during retirement.
Additionally, those who are either nearing retirement age or have already reached it have found that a reverse mortgage is an effective way to get a large sum of money to supplement their retirement fund. You can learn more about reverse mortgages and eligibility requirements by speaking with a broker like All Reverse Mortgage.