At some point between paying bills and hitting milestones big and small, you’ll reach a crossroads in life. That point when your mortgage payments are complete, your kids’ tuition is squared away, and your debts are all settled. Maybe you dream of road-tripping across the United States in a luxury RV, finally writing that novel, or sipping piña coladas poolside. But wait. Stop the music. For those dreams to become a reality, you need to save for retirement.
How much to save for retirement
The truth is, 21 percent of Americans have zero retirement savings. Meanwhile, another 10 percent have less than $5,000 saved. That means one in every three Americans barely has enough retirement savings to cover necessary living expenses for a few months—a long shot from living out their retirement dreams.
So, how much do you need to save for retirement? Unfortunately, there’s no one size fits all answer because there are so many factors to consider—like where you live, your pre-retirement income, and your preferred lifestyle. Following a general rule of thumb, financial experts recommend the 80 percent rule. For example, if your pre-retirement income is $50,000 per year, you would aim to have $40,000 saved for every year of your retirement. To make it even simpler, plug your info into a free retirement savings calculator like the one from Mint.com.
Open an IRA
Don’t fret if your retirement savings aren’t quite where you want. There are plenty of ways to get on the right track. One of the most common options is to open an individual retirement account (IRA), which is an excellent supplement to an employer-sponsored 401(k). There are two types of IRAs: a traditional IRA and a Roth IRA. With a traditional IRA, you don’t pay tax on any money contributed now—but you will pay tax on it later when you retire and withdraw. A Roth IRA works in reverse. You contribute post-tax money now—but then you won’t need to pay tax when you withdraw later in life.
So why are IRAs popular? The beauty of an IRA is that it has the potential to help you reduce how much you pay in taxes. For example, if your income is relatively low now, you might benefit from contributing post-tax money now and reaping the rewards of not paying taxes when you withdraw.
Start saving for retirement today
Depending on where you’re at in life, retirement can seem like an intangible thing in the distant future. But life moves fast, and it’s never too early to save for retirement. No matter where you are in your retirement journey, start taking steps today that will get you closer to that RV or poolside piña coladas.
Need help saving for retirement? DEXSTA can help. Contact us to talk about which type of IRA is the right fit for your lifestyle and goals.