When you want to start saving money for the future, the information out there can be completely overwhelming. So below, I’ve included three smart and simple ways to get your retirement savings off to a good start.
1. Get Your Full Company 401k Match
During the financial crash of 2008, many companies stopped or severely dropped their 401k matching program. However, today, the amount of companies who are offering matches to their employees is up, and yet there are still so many employees who don’t take advantage of it.
There are many different types of company match programs, so you’ll need to check with your company’s HR department to learn the specifics of yours. Essentially, a 401k match is when your company agrees to match your 401k contributions up to a certain percentage. Many people lose money by “front-loading” their 401k, which means they deposit a large lump sum into their 401k at the beginning of the year.
This is actually detrimental to many people because most employers match 401k contributions on a payroll basis, so if you put all your money in at one time, you could miss out on their match. Additionally, many people don’t realize that they have to actually contribute a certain percentage of their paychecks to their 401ks to receive a match. So, you could be diligently putting money into your 401k each month, but it might not be enough to receive a company match. As stated, check with your HR department to make sure you understand your company’s match policy.
Most importantly, don’t be afraid or hesitant to ask as many questions as possible about your 401k matching program. After all, it’s your retirement money and your company’s free contribution money that you could be missing out on.
2. Open an IRA
An IRA, or an “Individual Retirement Account” is a great way to save additional money for your retirement in conjunction with your 401k. It also works well if your company does not offer you a 401k or if you are self-employed. However, it’s important to note that you can’t contribute to one if you make more than $127,000 a year for an individual or $188,000 a year for a couple filing jointly so they are not for everyone.
Opening an IRA is surprisingly easy. All you need to do is choose a reputable company like Vanguard or Charles Schwab, put in your information, and create an account. It literally only takes a few minutes. You’ll also want to decide which type of an IRA you want. The two most common types are a Traditional IRA and a Roth IRA.
A Traditional IRA is deductible. If you make $32,000 a year and you put $2,000 in your Traditional IRA, then you are only taxed on $30,000 worth of income. However, you do have to pay taxes on what you earn at the end when you withdraw your earnings. If you don’t want to do that, you can open a Roth IRA. For a Roth IRA, you aren’t taxed at the end, but you also don’t get to deduct what you put in from your income. It’s important to note that IRA’s max out at $5,500 per year for those who are under 50 years old and $6,500 for those who are over 50, so be sure that you also have other forms of retirement accounts in addition to your IRA.
3. Diversify Your Investments
Diversifying your investments means that you don’t want to put all of your money in one place. So, you don’t want to have 100% stocks in your portfolio in case the stock market crashes. Similarly, you don’t want to put all of your money in real estate in case the market experiences a severe decline again. So, the best way to ensure your investments will give you a good return is to diversify. Most people invest in stocks and bonds in addition to a few other forms of investments like foreign investments, real estate, and cash equivalents.
If you are unfamiliar with investing, a good first step would be to speak to a financial advisor. You can find a financial advisor through the advice of friends or in house at your bank. It’s best to work with one who doesn’t mind explaining investment in layman’s terms so that you are just as much of a part of your investment future as they are.
Your advisor will help you decide if you should be an aggressive or a conservative investor. If you’re young, you can afford to be more aggressive and then make your portfolio more conservative as you get older. They can also help you to decide what percentage of stocks and bonds should be in your portfolio.
What other tips do you have for someone who wants to start investing?
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