When you start thinking about your future, there’s one thing that’s sure to cross your mind – retirement. Whether you’re a seasoned employee or new to your career, it’s good to start thinking about a retirement plan and, better yet, how you’re going to prepare your savings for that day. While it can seem overwhelming to think that far ahead, we’ve outlined some simple steps to help get you started and put your mind at ease. Are you ready to invest in your financial future?

Get an Early Start

It’s never too early to start saving. Of course, this rule goes for anything – personal savings, saving for a long-term goal – but it can be especially true for retirement savings. If you’re just starting out in your career, then don’t wait to start saving! Not only will you develop a good financial habit, but you can also take advantage of compound interest. With compound interest on your retirement account, you can earn interest on interest. As that interest grows, it can create a snowball effect by accumulating money at a rapid rate. For example, if you start saving in your early twenties and put away almost $5,000 each year, you could earn nearly twice as much as a person who starts saving in their thirties and puts away the same amount!

Determine Your Goals

Now that you know when to start saving, it’s time to figure out how much you need to save. You’ll want to start by examining the expenses you have now and thinking about the expenses you might have after you stop working. For instance, do you plan to travel once you retire? Will there be unexpected medical expenses? Will you still have a mortgage to pay off or a family to support? A good rule of thumb is to calculate your annual expenses and then multiply that number by 25 to get an estimate of how much you’ll need to save. Once you have this figure in place, you can calculate how much you should set aside each year in order to reach your goal by your planned retirement age. If the amount you need to save sounds too high, you can also start by saving 15% of your income by age 25 and slowly increasing that percentage as your income grows.

Start a Retirement Account

Next up is to figure out where you want to save your money. When it comes to retirement accounts, there are a few different options for you to choose from, namely a 401(k) or an IRA.

A 401(k) is usually an employee-sponsored retirement account. As such, it makes it easy to save since the amount you choose to contribute will be automatically deducted from each paycheck. The other perk to having a 401(k) is that you can get paid to save if your employer offers matching contributions. In this case, your company will contribute the same amount that you do to your 401(k), which can be a big help in reaching your retirement goals faster. Plus, everything you put into your account may be tax-deferred, meaning that you can grow your retirement fund using pre-tax dollars.

An Individual Retirement Account, or IRA, is one that you usually create outside of your employer. With IRAs, there are two versions to choose from – Traditional or Roth. The difference between these options lies in their tax exemptions. For a Traditional IRA, you may be able to deduct the money you contribute from your annual taxes while growing the account. However, you’ll be required to pay income taxes on the account’s funds once you begin withdrawing from it post-retirement. Meanwhile, a Roth IRA does not allow you to deduct your contributions. Yet this does pay off down the line since your retirement withdrawals will not be taxed.

Before choosing between a 401(k) or an IRA, it’s a good idea to do more research on their advantages and disadvantages. You can also consult with a financial advisor to learn more about which option may be a better fit for your situation.

Contribute Regularly

No matter which retirement account you choose to invest in, it’s good to contribute regularly with each paycheck. After all, it’s much harder to build a strong nest egg for retirement if you’re adding funds infrequently. As we’ve discussed, it’s good to build savings habits and even better to set up automatic contributions or instinctively add to your savings before using your income for any other costs. If you’re worried that you won’t be able to balance retirement savings and other expenses, then start small by saving what you can. As we’ve already discussed, it’s good to aim for 15% of your income as your monthly retirement contribution, but you can always start out lower and begin increasing your contribution as your income grows. Just be sure to keep track of your contributions and compare them to your savings goal. This way you can determine if you’ll be able to achieve your goal in time, or if you need to make some adjustments to retire comfortably.

Hands Off Your Savings!

Dipping into your savings before you’ve met your goal will not only set your progress back, but it can also have major consequences. For retirement accounts, there can be conditions in place that prevent you from withdrawing from your account before a certain age. If you do violate those conditions, then it can lead to withdrawal penalties. So while it may be tempting to reach into your savings account as it grows larger, it’s best to resist the urge. You may end up having to owe money!

Summary

Although retirement may seem far away for some of you, it’s better to start preparing now before it creeps up on you. The best way to prepare is to start investing in your financial future. By following the steps outlined above and creating a retirement savings plan that works for you, you can rest assured knowing that you are building a solid foundation of wealth for a happy retirement.