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When is the best time to start saving for retirement?

If you want the honest answer, the day you showed up at your first lifeguarding job at age 16 was the day to start saving for retirement.

However, we all know that kind of foresight doesn’t happen most of the time, and to be honest, even if you start saving a teensy bit later in life, you’ll likely do fine with regard to retirement savings, depending on a few factors.

Nevertheless, if you’re not currently contributing to a retirement plan, you might want to start saving now, no matter your age.

If you’ve started to save, you might want to invest, too. Check out our picks for Best Roth Individual Retirement Accounts and Best Individual Retirement Accounts.

The retirement crisis in America

You only have to Google it to see the truth: The American media lament the “retirement crisis.” Simply put, Americans aren’t saving enough money.

According to the Economic Policy Institute, the average retirement savings of all working-age families (32-61) is $95,776. If you dive down deeper (since that figure does include the higher-age end of the spectrum) you’ll see that for Americans between 40 and 45 years of age, the median retirement account balance is just $14,500. Here are a few mistakes many, many Americans make:

  • Not saving early enough
  • Not saving often enough
  • Not understanding how much to save
  • Not using an IRA or a 401(k) as your savings vehicle
  • Assuming you’ll want to work forever
  • Not paying attention to asset allocation if you have a retirement plan
  • Borrowing money from retirement funds (and never paying it back)
  • Planning to rely only on social security or a pension plan in retirement

Pensions

In decades past, predictable income from company pensions were a staple of the American retirement. The results of a loyal clock-in for 30 years has drastically changed; the heydey of effortlessly subsidizing your golden years is effectively over.

A Towers Watson study found that from 1998 to 2013, the number of Fortune 500 companies that offered traditional defined benefit plans dropped 86 percent, from 251 to 34.

Government employees can still receive pensions, though in some states, these programs are tragically underfunded. It’s very possible that if you’re currently on a defined benefit plan, it could eventually turn into a defined contribution plan.

Social Security benefits

If your plan is to depend on Social Security to cover you after retirement, you’re asking for trouble; the average Social Security check is around $1,400 per month. That’s hardly a way to live the high life during retirement, and don’t forget, healthcare is a huge expense, too. You’ll likely spend around $275,000 in health care bills during your golden years.

And what about if you need long-term care? The average facility can run you $6,000 a month. No joke.

The miracle of compound interest

For most 22-year-old, fresh-from-college grads, retirement seems like an eternity away. However, that’s the precise logic that gets people into trouble when they’re 40, 50 and even nearing retirement.

It’s easy to put it off: “I’ve got time. Let’s remodel the kitchen, go on a few trips, pay for college for our kids. I’ll save later.”

It’s even easier to say, “I can’t afford it. I need every penny I earn.”

Before you know it, you’re 65, it’s time to retire and you only have $250,000 in your 401(k). That’s why it’s important to invest early and often, and here’s the proof. If you’ve ever heard of compounding, you know why it’s such a miracle. This chart is a great example of the miracle of compound interest:

You can see plain as day from this chart that Investor A (assuming 11% returns) will benefit the most. By investing $5,000 a year every year for ten years at different ages, it’s clear from final amounts that earlier is better.

There are compound interest calculators galore on the web, and the SEC also has one that you can check out if you’re curious to see how much your investments can make in 10, 20, 30 or more years. This is a great way to find out.

What do I do if I haven't yet started?

Whatever you do, don’t panic; even if you’re 40, 50 or even 60, it’s better to start now than do nothing at all. However, if you’re in one of those age brackets and you haven’t started saving, it’s imperative that you realize that you have a lot of catching up to do.

How do I save for retirement?

It’s simple to make a commitment to save. And if you’re late to the game, you’ll need to save as much as you possibly can. March yourself to your company’s HR office and ask for the paperwork to open an account. Also:

  • Take advantage of employer contributions: Don’t miss out on FREE money! Usually, the only requirement is to pony up a certain percentage of your money to get the company match.
  • Figure out your asset allocation (the amount you’ll invest in different types of assets, including stocks and bonds) by talking to your company’s retirement advisors; their advice is free.
  • Simplify it; this is not rocket science. Make it automatic. Enrolling in an automated plan will amaze you because chances are, you won’t even miss the money.

How much income do I need to save?

If you can save 10-15% of your income (or even better, max it out!) in a pre-tax retirement account, that’s excellent.

If the idea of investing 15% is scary, remember that it won’t actually reduce your take-home pay by that much; that’s why it’s called “pre-tax”. If you still don’t think you can do it, save as much as you possibly can and especially enough to get the company match. Then, aim to raise your contribution by a percentage each year.

Types of retirement fund options

A 401(k) (the behemoth of them all) is named after the tax code that governs them. 401(k)s came out in the 1980s as a way to supplement pensions. Essentially, a 401(k) is an employer-sponsored retirement savings plan. Employees are allowed to save and invest a piece of their paycheck before taxes are taken out. Taxes aren’t paid until the money is withdrawn from the account.

There are a few different options for your money. You can invest in a traditional IRA or a Roth IRA. Here are the differences:

Traditional IRA Roth IRA 
Who’s eligible Anyone younger than 70 ½ earning an income in the year of contribution Single or head of household: Must earn less than $135,000 Married filing jointly: Must earn less than $199,000
Contribution limits Up to $5,500 unless you are age 50 or over, in which case it is $6,500. Up to $5,500 unless you are age 50 or over, in which case it is $6,500.
Tax benefits Contributions are tax-deductible and withdrawals in retirement are taxed at your income tax rate upon retirement. Contributions are made after-tax and earnings and withdrawals are tax-free at retirement.
Withdrawal rules Can begin withdrawing money without paying a penalty at 59 ½. At 70 ½, you must stop contributing and must begin withdrawing a minimum amount. Not required to take a required minimum distribution (RMD) from a Roth IRA; can begin withdrawing money at age 59 ½ without paying a penalty.

Traditional IRA

A traditional IRA continues to be more commonly used than Roth IRAs, possibly because they are better known and are the type of IRA used for traditional 401(k) conversions. But relative popularity isn’t the only reason to choose a traditional IRA.

If you anticipate that your tax bracket will be lower when you withdraw from your IRA, than a traditional IRA is likely the better choice. If you consider what your income might be when you reach the mandatory withdrawal age of 70 ½ or at any age over 59 ½, when you aren’t subject to the 10% penalty, a traditional IRA may provide tax advantages.

Contributions made within traditional IRA guidelines are usually tax deductible, allowing you to put a hundred percent of your contribution to work. If your tax bracket is low — or even zero — at the time that you need to withdraw, you can significantly reduce the effect of taxes on your IRA balance.

Another case in which a traditional IRA may have an advantage is in the case of 401(k) rollovers. When rolling over a 401(k) into a traditional IRA, there’s no immediate tax consequence. Choosing to roll over to a Roth IRA, however, will make the 401(k) rollover immediately taxable.

Check out Benzinga’s Best IRA Accounts for more information.

Roth IRA

A Roth IRA is an individual retirement account that offers tax-free growth and tax-free withdrawals in retirement. Roth IRA rules stipulate that as long as you’ve owned the account for five years and you’re age 59 ½ or older, you can withdraw money when you want without paying federal taxes.

A Roth IRA is a wonderful investment vehicle when you believe your taxes will be higher in retirement than they are right now. That’s why it’s a great option for young people who have just started their first job because it’s very likely that their taxes will be higher in retirement.

In addition, you can withdraw your contributions at any time without taxes or paying a penalty. You can use up to $10,000 to purchase a first home for yourself or certain family members. In addition, you can pay for higher education costs for yourself or a family member. (You’ll still pay income taxes if you withdraw earnings early, however.)

Check out Benzinga’s picks for Best Roth IRAs for more information.

If you own your own business, do your research on the following types of plans:

  • SEP IRA
  • Keough Plan
  • SIMPLE IRA

Final thoughts

Whether you’re 25, 35 or 55, the time is now to get started on saving for retirement. Fortunately, Benzinga has you covered. Check out our Best IRA Accounts and you’ll be set.