Picture this. You’re 23 and have just graduated from university. You came top of your class which made your parents extremely proud. On top of this, you’ve been head-hunted by a top bank and they’ve invited you to join their prestigious graduate programme. Only a handful of people get chosen and you’re one of them.
Your parents are doubly thrilled by this, but they caution you to start saving for your retirement. You think to yourself: “Why should I do this? That’s an incredibly long time away!” However, as you get busier the time flies and before you know it, you’ve reached retirement age and have nothing to show for it.
Make sure that this doesn’t happen to you and start saving, as early as you can, for your retirement. Here is a list of the best savings vehicles to help you start your savings fund so that you can retire, when the time comes, having peace of mind.
Defined Contribution Plans
Simply put, these plans have a cap on the amount of money that you can invest in them. In 2020, for those under 50, the contribution limit is $19 500, but for those who are 50 and above, the limit is $26 000.
Many of these types of plans offer what is called a Roth version. If you decide on this version, you’ll contribute after-tax dollars to the scheme however when you do decide to retire you’ll pay less tax on your final lump sum.
The most well-known examples of the defined contribution plans are the:
- 401(k) – employers of any size can offer these to their staff members
- 403(b) – public school employees, as well as employees of certain tax-exempt organisations, can take these policies out
- 457(b) – this is available to state and local government employees
The massive benefit of these plans is that you can schedule money to be taken directly off your account and invested in high-yield stocks and bonds. Also, this is taken off your salary before tax so, in essence, you’ll reduce your taxable income.
If you do decide that you need to access this money in an emergency, you’ll have to pay hefty amounts of tax on it. So, think very carefully before you make any withdrawals.
The IRA is a plan, which was created by the US government to help workers save for retirement. In 2020, the under-50s were allowed to save $6 000 annually, but those over 50 were allowed to have $7 000.
As with the defined contribution plans, your investment comes off pre-tax, which saves you money as your taxable income becomes that much lower. However, if you need to withdraw any money, you could be facing hefty fees.
A pension is a defined benefit plan and is solely managed by the employer. The funds become available on retirement. As the benefits increase in value, the more time that you spend with the plan, if you change jobs before you retire, you could end up getting a lot less.
We strongly encourage you to start saving for your retirement as soon as you can. Remember that with the power of compound interest, the more that you save, the more money you’ll have at the end of the day.