Saving for retirement is challenging. That’s why our three-part series this week focuses on how to get your long-term savings on track. First, we explored why habit formation is so important for long-term savings and investments. Below, we tackle why there is no one-size- fits-all solution. And later this week, we will get into how streamlining your retirement portfolio with the help of an individual retirement account (IRA) can potentially help you reach your goals.
Retirement planning is a long and personal journey. While the goal may be the same for all of us – to save enough money to sustain our life and lifestyle after retiring – our respective paths will be unique. And the great variety of investment options and retirement accounts further complicates things. There’s no one-size-fits-all solution when it comes to retirement planning.
Creating a strategy that fits your individual financial situation, long-term goals, and time horizon can help you stay on track. And that’s exactly what we’re tackling today.
Finding Your Path
A lot of your financial decisions – whether retirement-related or not – are driven by your individual circumstances, including factors such as your age, income, goals, and risk tolerance. For example, if you start saving in your 20s, you may get more bang for the money you invest through the power of compound growth (as we discussed in the first article of this series). But it may be harder to find the money to invest given that most people tend to earn less at the beginning of their career.
The first step in developing a strategy may be the trickiest: figuring out how much money you will need for retirement. A rule of thumb says you should save 10 times your annual salary. The 80% rule aims to replace 80% of your pre-retirement income by the time you leave the workforce through withdrawals from your retirement savings. Another (simpler) rule of thumb suggests saving 15% of your annual salary for retirement every year. Depending on whether you have already gotten started on saving, these rough guidelines may give you an idea how your savings to date stack up.
For most people, saving for retirement involves investing, which can provide a much higher return than a simple savings account. As such, you’ll need to consider your risk tolerance. All investments come with some risk – but some are riskier than others. Building a diversified portfolio that includes different types of investments, such as stocks, bonds, cash, and alternative investments, can help you balance your overall investment risk. And your time horizon may also play a role: Conventional wisdom suggests that younger people should invest more aggressively and gradually dial it back for more conservative investments as they approach retirement.
If you’re not sure where to start your investing journey, consider speaking to a Certified Financial Planner, a service SoFi offers to members.
Your Savings and Your Tax Bill
Tax loopholes aren’t only for the ultra-wealthy. In fact, strategically navigating your taxes is a huge part of saving for retirement. By offering tax savings on your contributions or on your eventual withdrawals, these types of accounts allow you to effectively save more. There are pros and cons to paying taxes up front or later, much of which is connected to your current and your expected tax rate. If you’re in a lower tax bracket now, saving post-tax dollars today is great. Meanwhile, if you’re in a higher tax bracket now than you expect to be in retirement, paying Uncle Sam for your eventual retirement withdrawals is a more cost efficient way to save.
If you’re a high earner in a high income tax bracket, it may be advantageous to lower your tax liability now by using an Individual Retirement Account (IRA), which are among the most popular retirement savings accounts. Contributions to a traditional IRA are tax deductible, but your withdrawals (after the age of 59½) are taxed as regular income. In contrast, with a Roth IRA, contributions are not tax deductible, but withdrawals made after age 59½ (of funds that have been held for at least five years) are tax-free. For both types of IRAs, the 2024 contribution limit was $7,000, or $8,000 over the age of 50. These limits will remain the same in 2025.
The other major type of retirement savings account is the 401(k), which is offered by an employer. With this type of savings plan, you don’t have to pay taxes on the money you deposit; and in a way, you’re shielding a portion of your income from being taxed. Withdrawals in retirement are taxed as ordinary income. But the biggest potential advantage comes if your employer offers a match: This is essentially free money to boost your savings and financial planners often recommend maximizing your 401(k) match possibilities before contributing to other retirement plans like IRAs. Last year, the 401(k) contribution limit was $23,000.
You can have both a 401(k) and an IRA that you contribute to every year. You can also use your IRA to consolidate old 401(k) from previous jobs into one account. (SoFi offers you a 1% match for any rollovers and contributions to a SoFi IRA.) We’ll discuss this in detail in the third part of our series. By combining the two types of accounts for your retirement planning you can take advantage of their benefits at the same time, potentially giving you more control over your finances. Investing through both a 401(k) and an IRA also allows you to take advantage of compounding growth with two different sums of money, potentially boosting your retirement nest egg even further.
Your Flexibility and Control
An IRA allows you to build a balanced portfolio, including stocks, bonds, mutual funds, and even real estate. This flexibility enables you to build a diversified portfolio that aligns closely with your financial goals and risk tolerance. This level of control can be particularly beneficial if you want to take a more active role in managing your retirement savings. If you’re looking to set up an account for yourself, check out the SoFi IRA and get started.
Employer-sponsored plans like 401(k)s also give you some choice in determining your investments, but they’re often much more limited. For example, you may only be able to set your risk tolerance rather than pick and choose the exact asset classes or sectors you put your money into. Other plans may allow you to choose between specific portfolios. Either way, your investing choice is likely more limited with a 401(k).
The bottom line is this: The best time to start saving and investing was yesterday (or 15 years ago). But the next best time is today. There are advantages and drawbacks to both 401(k)s and IRAs. But by combining them to save for your future, you can get the best of both worlds, maximizing both your immediate benefits (such as tax deductions and contribution matches) and long-term growth potential for a comfortable retirement.
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