3 Ways to Start Saving for Retirement
Updated: Nov 3, 2019
There are some caveats to this one. The first one is that you need to pay off high-interest debt, like credit cards. Then create your emergency fund (1-3 months’ expenses, minimum). You should start saving for retirement while paying on your student loans, if you have them.
Once you have a job that offers a 401(k), enroll in it. If the company matches your first 3%, contribute 3%. Even if your company doesn’t match, this is pre-tax money (meaning if you make $40,000 and you put $1,000 in your 401(k), you’re only taxed on $39,000), so contribute even 1% to get started. Every time you get a raise, add 1% to your contribution.
As soon as you can, open a Roth IRA. Roth’s contain post-tax money (and eventually, the gains on that principal). So, when you’re young and not making nearly as much as you will be later on, you should take advantage of a Roth IRA because your tax rate should only increase over time. The cool thing about them is your money will earn interest for, say, 30 years and you won’t pay taxes on any of those earnings because you already paid them. Another benefit is (and I advise against this), you can take the principal (what you put in) out at any time without a penalty.
Note that you cannot start taking distributions until you’re 59 and ½ and you HAVE to start taking them at 70 and ½ for 401(k)'s and Roth IRA's.
A health savings account is a retirement gift from heaven. No taxes when you put the money in. No taxes when you take the money out. The only catch is you have to use it for medical expenses. When you’re retired, though, that could be 25% of your expenses, so it will get used. Most estimates say couples will have $200,000 in medical bills in retirement. Enroll in this if your company offers it.
The earlier you start saving for retirement, the less you have to save.