If you asked any financial advisor when to start saving for retirement, their answer would be simple: Now. Retirement accounts of any kind are like wine—they have the potential to drastically improve with age. Setting aside a little every year starting in your 20s can make the difference between hundreds of thousands of dollars of accumulated interest by your 60s and 70s. That’s why it’s important to begin planning for retirement early.
So how do you start planning for retirement, and what is the right plan for your personal needs? It really depends. Some people enjoy crunching numbers and making excel sheets and specific financial plans, while others may prefer to take a more hands-off approach. Some may be working for a company with pension options or a 401(k), while others may need to use an Individual Retirement Account.
And some people may prefer the advantages of investing in safe commodities, either personally or with the assistance of financial advisors. There are many ways to grow the value of a single dollar in the future, if you know exactly how.
The sooner you start saving for retirement, the better. To see where you stand (and where you are heading) use our simple retirement savings calculator. This will help give you a little perspective on how to get started on your retirement savings strategy.
The Different Ways to Save for Retirement
So what kind of savings or investment method is right for you? First, let’s walk through the common types of retirement funds. It helps to know what exactly is out there.
A 401(k) is a workplace retirement account typically offered by employers. You contribute a portion of your pre-tax paycheck and put it in an investment account. These accounts are tax-deferred, meaning, you only pay taxes when withdrawing the savings much later in life. One of the many benefits of the 401(k) system is that it lowers your taxable income. This can be useful, especially if it bumps you into a lower tax bracket.
For instance, if you’re making $85,000 and you’re contributing $10,000 annually to your 401(k), then you’ll only be taxed on $75,000 of that income. One of the downsides is that by withdrawing these funds early you could have to pay a 10% tax penalty, and even have local taxes to deal with. But the good news is that employers often match employee contributions to their 401(k), sometimes up to 6%.
IRAs—individual retirement accounts—are another fairly typical way to invest your savings for future retirement benefits. This type of retirement account also allows you to invest contributions tax deferred, and you don’t have to pay any annual investment gains. With most IRAs, you pay income taxes on the money once it’s withdrawn at retirement, and if you don’t have a 401(k) account at work, you’ll be able to deduct IRA contributions on your annual income tax return.
An IRA is an investment account that is not tied to your workplace. Money placed within it goes into stocks, bonds, ETFs, and mutual funds. You can trade within the IRA but cannot cash out before the age of 59.5 without having to pay that 10% penalty. So, if you’re putting that money in there, expect it to stay for a long while.
401(k)s and IRAs also, it should be mentioned, come with a variety of options. For instance, there are Roth IRAs—these are IRAs that you contribute after-tax income to, but the gains generated isn’t taxed upon withdrawal. There are also Roth 401(k)s which follow the same general rules. In addition, there are SIMPLE—Savings Incentive Match for Employees—IRAs, as well as SEP—Self-Employed Person—IRAs that are a variation of the general IRA plan.
What is a Wealth Account?
A wealth account is an investment vehicle, just like a 401(k) or an IRA. However, there aren’t penalties for withdrawing your money before retirement with a wealth account. Wealth accounts are often called after-tax accounts because you contribute money you’ve already paid taxes on—and you pay taxes on the capital gains when you withdraw your cash.
Some wealth accounts come with management fees, but at SoFi, there are no fees until you have $10,000 in your SoFi Invest® account. A SoFi Invest account pools together a series of investments, creating a diversified portfolio in order to minimize investment risk.
Taking the First Step to Retirement
The bottom line is that retirement and wealth accounts help you save for retirement. Just one dollar put away now could be worth a lot more in the future. Whether you can invest $10,000 now or just $100, the priority should be to start investing.
Choose how you want to invest.
SoFi can’t guarantee future financial performance.
SoFi doesn’t provide tax or legal advice. Individual circumstances are unique. Consult with a qualified tax advisor or attorney.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
This information isn’t financial advice. Investment decisions should be based on specific financial needs, goals and risk appetite.
Diversification can help reduce some investment risk. It cannot guarantee profit or protect against loss in market declines.
Advisory services offered through SoFi Wealth, LLC, a registered investment advisor.