Building a retirement fund—which we’ll define as saving enough money to pay the bills when you’re no longer working—can seem like a daunting challenge. Taking a hands-on approach that focuses on what you can do today will help you tackle the challenge step by step.
Pull out key
- Building a successful retirement plan is a long process that requires commitment and discipline.
- Your main goal is to increase your income and reduce your debts.
- Saving money is not enough; You need to invest it wisely.
Retirement fund theory vs reality
Regardless of your age or current income, the recipe for a successful retirement is a simple one: Set goals, commit to them, and repeat. A popular approach that encourages potential investors to participate employer-sponsored retirement savings plan. Another suggestion to enter personal information in one computer retirement plan to predict how much money will be needed to fund retirement.
While both ideas are great in theory, practice can fall apart quickly. For example, consider about 31% of all private sector workers in the United States who were not entitled to retirement benefits, as of March 2022, as reported by the US Bureau of Labor Statistics. That, of course, makes 69% of people do, but only 75% of workers with access to a plan opt-in to that plan, and only 52% of all US workers in the private sector are saving. in a plan.
Also, the huge amount of money most people see when they use a retirement planning calculator may not work out. The goal of saving a million dollars or more seems unattainable for young workers with low incomes, heavy debt and nothing in the bank.
“Thinking about the total amount you will need in retirement is difficult. But I believe that if you break it down into small steps, it’s much easier to swallow,” said Shane P. Larson, CFP, senior financial planner for the group. Mainspring Wealth Advisorshas five offices in Washington state.
Given these realities, let’s start with a tough situation—most of us find ourselves just starting out in our careers—and lay out a realistic plan for building retirement. In this case, we will assume that you:
- No employer-sponsored savings plans and well-paying job
- Have a high debt burden from college loans, car payments, rent or mortgage, in addition to living expenses
52%
The number of US workers in the private sector participating in retirement plans as of March 2022.
Set goals, commit, repeat
Several goals can be set in this scenario. The first is to start saving. Even if it’s just a few dollars a week, open a bank account and make a deposit. While a bank account isn’t the best investment vehicle in the world, it’s a great way to start creating a savings habit. Remember, building a retirement fund is a long-term journey—and, as the saying goes, even a journey of a thousand miles begins with a single step.
Once you’ve set and committed to a savings goal, the next goals are clear: increasing income and reducing debt. Reaching the first goal will help you achieve the second. To increase your income, you can get a second job or get a job that pays more than your current job.
The power of compound interest is crucial to successful retirement planning.
While it can take time and effort to increase your income, it will help you stick to your plan if you keep in mind that this is a long-term endeavor. Set a goal of getting a better job (or a second job), then take the time to look for specialized work.
Once you’ve hit your goal, your newly earned income will help you reduce your debts. Then you’ll be able to stuff more money into your retirement. Combine a budget can help you with this process. It’s a great way to ensure that your money is being used wisely. Remember that the earlier you start, the more time your savings will grow through what experts call a “the magic of compound interest.”
“The power of compound interest is the eighth wonder of the world. “Having a long-term mindset with compound interest as your ally will allow you to turn a small, steady savings into a retirement,” said Mark Hebner, founder and president of the company. comfortable.” Index Fund Advisors, Inc. in Irvine, Calif., and author of “Index Funds: A 12-Step Recovery Program for Active Investors.”
Don’t just save, invest
Once you have increased your income and savings, you will have enough savings to trade in your bank account for a individual retirement account (IRA). At this stage, you are moving from saving money to investing money.
The Internal Revenue Service (IRS) establishes an annual limit on how much a person can contribute to an IRA. For 2022, individuals under age 50 can contribute $6,000 to an IRA. If you’re over 50, you can add a catch-up contribution of $1,000 for a total of $7,000 per year. For 2023, these numbers are $6,500 and $7,500 respectively.
Of course, you can start with a much smaller amount. IRAs are different from regular investment accounts; you need to open one with one IRA processing company.
If you don’t know much about investment, think of it as a way to get your money working for more money. From a practical standpoint, you can start by putting your money in a mutual fundas it is one of the easiest investment methods for beginners.
Simply choose an index fund that copies a major U.S. stock market index, such as the S&P 500 or a active management fund invested in blue-chip stocks. To stay focused, set learning goals more about investment and commit to that goal.
Start by looking at Investopedia’s investment introduction to pick up the basics and understand terms down. Let the topics that grab your attention help you determine the next topic you want to explore.
Again, this is a long-term endeavor. Don’t try to absorb everything at once. Just start reading, commit to doing it regularly, and stick with it. As you learn more, take the time to teach yourself about mutual fund fees and make sure you don’t reduce your interest by paying more than necessary.
Get yourself a 401(k)
As you master the art of budgeting and start investing, you’ll probably want more money to increase both your standard of living and the amount you invest. Another job search can help you achieve these goals.
This time, find a job that offers 401(k) plan with an employer that matches your contributions. Invest enough to get the full fit of the company. Over time, as you get raises and promotions, increase your contribution rate to the maximum allowed.
“Working for a company with a 401(k) is one thing. Working for a supply company appropriate contributions is another one. David N. Waldrop, CFP, president of Bridgeview Capital Advisors, Inc.in El Dorado Hills, Calif.
The IRS has established an annual contribution limit for 401(k)s. The maximum contribution to a 401(k) fund—as an employee—is $20,500 for 2022 ($22,500 for 2023). If you’re over 50, you’re also allowed to make an offset contribution totaling $6,500 for 2022 ($7,500 for 2023).
For example, let’s say you make $50,000 per year and your employer is willing to pay you 5% of your salary as long as you also contribute a minimum of 5%. Therefore, your minimum contribution will be $2,500 (5% of $50,000), and your employer will deposit $2,500 annually into your 401(k). Recruiter’s match is free money.
The right amount annually has the potential to dramatically increase your savings rate as the right contributions are invested, the interest and income on that money will compound over the years along with the your contribution.
Can I set up my own retirement fund?
Yes, you can set up your own retirement fund. One of the most common ways to do so is to open an individual retirement account (IRA). IRAs come in two forms: a Traditional IRA, which is funded with pre-tax dollars, and a Roth IRA, which is funded with after-tax dollars. The annual contribution for both is $6,000 in 2022 and $6,500 in 2023, with a catch-up contribution of $1,000 if you’re 50 or older. Roth IRAs come with income limits, which determine how much you can and cannot contribute.
How do I create a retirement plan?
Creating a retirement plan starts with creating a budget. Knowing how much income you have and what your expenses are, will help you understand your financial situation. The goal of this is to cut debt and save money. The more you save, the more money you can set aside for retirement.
Once you’ve saved money, you can start contributing to retirement plans, such as individual retirement accounts (IRAs). If your employer has a 401(K), you can also contribute to it, especially if they match contributions. Other such plans include 403(b)s, 457(s) and Thrift Savings Plans. If you’re about to retire instead of starting your career, you’ll have a better idea of how much money you’ll need in retirement and you can begin to adjust accordingly.
Can you build your own 401(k) fund?
If you don’t work for an employer, you cannot contribute to a traditional 401(k); however, if you are self-employed, you can build your own 401(k) fund. For example, if you are self-employed and have no employees, you can open a separate 401(k) fund and contribute to it as both an employer and an employee.
Key point
Retirement planning is a long-term endeavor. Think of a marathon rather than a sprint. It will take most people a lifetime of effort to build a solid retirement fund.
Craig L. Israelsen, Ph.D., portfolio designer of 7Twelve Portfolios in Springville, Utah. “When you think about preparing for retirement, think Crock-Pot—not the microwave.”
Commit to work hard and continue to improve your position by reducing your debts, improving your income, and improving your education (among other activities). While the first few years will be challenging, with each passing year the progress you make will become more apparent.
