Hello 30: It’s time to start saving for retirement

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I started saving for my retirement as soon as I started my post-college career at 23, but I know that’s not everyone’s story. I have friends in their thirties who have deferred their retirement savings because they are trying to pay off student loans or other debts. And even if you’ve gotten rid of most of your debt, switching to savings can be overwhelming.

Find your number

Before you open a retirement savings account anywhere, you need to decide how much you can save without putting a strain on your budget. The general advice is to invest 10% to 12% of your earnings as soon as you start working. However, if you start late, this number may need to be 15% or more.

A retirement savings calculator can help you estimate how much you’ll need to save, depending on when you plan to stop working and your retirement plans. These calculators provide an estimate of your retirement nest egg based on your annual salary, the percentage you plan to contribute, projected investment returns, potential raises and more. If your employer offers a pension plan, the plan provider may offer a calculator. Or you can go to www.bankrate.com and select “Retirement Calculator” under the “Retirement” navigation tab of the site.

If it’s not possible to save 15% of your income, reduce it to a percentage you’re more comfortable with. As your salary increases, you can increase contributions. Another option is to enroll in auto-escalation, which is offered by many 401(k) plans. Typically, the plan will automatically increase your contribution by a percentage point at a specific interval — annually, for example — until you reach 15% (or some other amount). If you’re still paying off student loans and other debts, contribute at least enough to your retirement plan to get employer match.

How to invest

With a traditional 401(k), your contributions are made on a pre-tax basis, reducing your taxable income and lowering your tax bill. For 2022, you can contribute a maximum of $20,500 to a 401(k) or other employer-provided plan. If your employer offers a matching contribution, the sooner you join the plan, the better. Otherwise, you are leaving free money on the table.

If you don’t have access to a workplace retirement plan, you can set up a traditional or Roth IRA at a financial institution. With a traditional IRA, your contributions are deductible if you don’t have access to a workplace retirement savings plan, no matter how much you earn. Even if you have access to a plan at work, part or all of your contribution may still be deductible if your 2022 modified adjusted gross income is less than $78,000 if you are single or $129,000 for married couples who file jointly. Contributions to a Roth account are after-tax, but all withdrawals will be tax-free as long as you are 59½ and have owned the Roth for at least five years (you can also withdraw contributions tax-free at any time). For 2022, you can contribute a maximum of $6,000 per year to a traditional IRA, a Roth, or a combination of the two. Whether you go the 401(k) route or invest in an IRA, you need to select a diversified portfolio of low-cost investments. For millennials who enroll in their employer-sponsored plan, the path of least resistance is usually a target date fund. Simply choose a fund that is closest to the year you plan to retire. Once you sign up, the professionals decide which funds to buy and how much to invest in stocks and bonds. As you approach retirement, the fund reduces your exposure to risk. Your only job is to provide the money.

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