How to Start Your Retirement Savings from Scratch
If you ask somebody about saving for retirement, the first thing you’re likely to hear is, “start as soon as possible.” It’s important to take advantage of compounding interest early – even a few years of waiting can make a huge difference come retirement time.
Knowing you need to start saving now is well and good, however most people don’t know where to begin, but it can be overwhelming. So let’s talk retirement savings basics and where to start.
Fit your budget & automate
To start saving money for retirement, you need to make room in your budget to put aside at least a small percentage for your retirement account. If you don’t already have a budget – make one – and consider where you can save money and how much money you realistically put into retirement savings. And automate that savings from your paycheck so it’s not easy to stop.
One of the most common retirement savings routes is the 401(k), which is a plan offered by many employers. Under a 401(k) plan, you place a portion of your paycheck into a retirement account. The money you contribute comes from your paycheck before taxes are applied. In some cases contributing to your 401(k) could reduce your income taxes.
Your employer will often match your contributions, up to a certain percentage. The goal is to contribute enough to max out your employer’s contributions – you’re leaving money on the table if you don’t. Even if you can’t contribute enough to reach employer maximum match, it’s still good to contribute what you can.
No 401(k)? Try an IRA or Roth IRA
Not offered a 401(k) at work? There are still options. Two of the most common alternatives (or supplements) to a 401(k) are IRAs or Roth IRAs. Just like a 401(k), you’ll make regular contributions to your IRA accounts, however they carry different tax rules.
To over simplify, a traditional IRA account lets your contributions grow, only being taxed when you receive distribution of the account in retirement. A Roth IRA is the opposite, in which you make contributions after taxes but distribution and future earnings are generally tax-free.
There are many other retirement plan options and more details to consider when looking at 401(k)s or IRAs. If you don’t have the resources at work, it’s best to get in contact with a personal financial planner. Financial planners can help review all your options to find the best plan for your situation.
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