The following is a guest post from Jenna Smith. Consideration was received for the editing and publishing of this post.
Let’s talk about some of the ways that you can save for retirement. Sure, you could use a simple and standard savings account, but if you want to have as much money as possible come retirement time, there are other things that you should do and other ways in which you should invest.
Investing is a scary word, I know. For most of us, it calls to mind pointy graphs that trend downward, horror stories of people losing everything in the stock market, and other frightening images. With regards to retirement, however, investing is really just saving . . . but it’s saving on steroids.
When looking at retirement savings options and plans, you’re going to hear a lot about pre-tax and after-tax and pre-tax is going to sound like the better deal. Why? Because when you contribute something to an account “pre-tax” it means that the amount of your contribution is taken out of your income before taxes are figured out. It essentially helps you reduce your tax liability while allowing you to save for retirement at the same time. Pretty great!
It’s important to understand that pre-tax contributions are not the same as tax free. You are going to pay taxes on that money eventually. With a pre-tax contribution, though, the amount of tax you pay is deferred until you start receiving payments from those accounts — and it will be taxed at whatever your current tax rate is, not your rate at the time when you invested the money.
Post-tax contributions, on the other hand, are invested after your income has been taxed, which means you have less take home pay now. But! The IRS won’t tax your income twice so you don’t have to worry about paying taxes on payments from post-tax accounts. Even what you earn is generally untaxed. So what you’ve saved is what you get.
Employer Based Programs
Many employers offer some sort of retirement plan as part of your benefits package (these are most often 401(k)s). Take advantage of that plan. A lot of employer-offered retirement plans are offered pre-tax and some will even match your contributions, which helps you save twice as much while reducing your current tax liability at the same time.
Make sure that any employer based retirement fund is transferable if you ever decide to change jobs.
Individual Retirement Arrangements
Setting up an Individual Retirement Arrangement is a fantastic way to save for retirement. You can use these accounts to supplement any plan you have through your employer. IRA accounts typically have a much higher interest rate than a regular savings account. It is also money that you are actively discouraged against dipping into if you find yourself short on cash. If you try to take money out of your IRA before you are 59 ½ years old, you’ll get smacked with a hefty fee (current fee is 10% of what you decide to withdraw). There are seven different types of IRAs but the most common are the traditional and the Roth.
IRAs are also fantastic retirement savings plans for people who are self-employed or who own their own business.
Money Market Account
A “money market” account is basically just a savings account too — but it has super high interest rates because it requires a higher minimum balance, only allows you to make a few transactions with the account each month, and requires larger deposits than a regular checking or savings account. The great thing about the interest on a money market account is that it compounds daily and is paid out every month. You can see how beneficial that is by checking out this money market savings graph by Discover.
The nice thing about a money market account is that it functions like a regular savings/checking account, your money is insured by the FDIC, you can put money in and take money out whenever you need to do so without a bunch of penalties, and it has the higher interest rates that are associated with other types of investments. It’s kind of the best of both worlds.
Note: You do have to pay taxes on the interest earned on some money market accounts, and there is a minimal level of risk associated with these accounts.
These are just three ways that you can save up for your (and your spouse’s) retirement. What’s your favorite way to save for retirement?