The goal of saving for retirement is building up enough wealth to sustain yourself throughout retirement. Now with longer life expectancies and potentially younger retirement ages, your retirement savings may need to last 3 decades or even longer. The term "nest egg" describes a large amount of money that is saved or invested for a specific financial goal. Your retirement savings may be the largest nest egg that you need to fund in your life. Continue reading to learn how to build a solid nest egg.
Consider Your Income
To fund your nest egg, you need to contribute money each month. If you have an employer-sponsored retirement plan, your contribution will come out of your paycheck pre-tax. You can also contribute to additional retirement accounts with after-tax funds, such as a Roth IRA.
However, you need to address your income and budget to set up these contributions. If you do not already have a monthly budget, it's time to set one up. Based on your other expenses, you can allot funds to put toward your retirement nest egg.
As far as how much you should be aiming to contribute, your goal should be to save 15% of your gross income for retirement. A great way to meet this is by taking advantage of any 401(k) matching your employer may offer. After maximizing your 401(k) contributions, put the rest of the 15% into other retirement accounts.
Understand Compound Interest
The key to building wealth is to invest it. If you place your funds in an account with a low yield, your money will not even keep on pace with inflation. Investing your funds allows your contributions to grow and compound interest over time.
The way compound interest works is the money you contribute grows based on interest, then your contributions and earnings continue to earn more from interest. The earlier you get starting on saving for retirement, the more you can earn in compound interest over your lifetime. Even if you cannot currently reach the 15% of your gross income savings goal, any funds that you can contribute to your retirement to give it the opportunity to grow over time is better than not contributing at all.
Choose Your Accounts
As discussed earlier, you do not want to place your retirement funds in a low-yield account. Instead, use retirement-specific accounts to house your funds. Different retirement accounts provide different tax advantages.
Employer-sponsored accounts, such as 401(k)s, 403(b)s, and traditional IRAs, are funded with pre-tax dollars, helping lower your taxable income in the year of contribution. Other retirement accounts, such as Roth 401(k)s and Roth IRAs, are funded with after-tax dollars, allowing you to have tax-free withdrawals once you're in retirement.
There are also other retirement-saving investment vehicles, such as annuities, that you could add to your portfolio over time.
Managing your retirement planning throughout the year can be stressful, especially with the current economy. With an advisor from Genesis Financial Group on your side, you can be confident that great retirement saving strategies are being put in place. Allow our team to utilize our expertise and reach your retirement goals. Schedule your consultation today to get started.
Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Genesis Financial Group and Cambridge are not affiliated. Cambridge does not offer tax or legal advice.