Less than half of Americans know how much they’ll need to save for their retirement, according to the U.S. Department of Labor. The amount depends on things like when you decide to leave the workforce, the type of retirement lifestyle you’re planning, where you’ll live and your health. The bottom line, however, is that it’s never too early or late to begin saving for retirement. Here are some ideas to get you started:
Enroll in a 401(k) plan
If your employer offers a 401(k) retirement plan, enroll. Since 401s are tax-deferred, your taxable income will be reduced. For example, if you earn $60,000 year and contribute $4,000 to your 401(k), you’ll pay income tax on only $56,000. As of 2013, the IRS limits your maximum contribution to $17,500.
Your employer may even match a portion of your 401(k) contribution. Say, your employer matches half of your contribution up to 6% of your $60,000 salary; you’re actually getting $3,600 in free money towards your retirement. Suffice it to say, contribute the maximum amount your employer matches.
Don’t forget: Cashing out your 401(k) early can result in a 10% penalty.
Determine your sources of income
Also, find out if you have other sources of income – Social Security, personal savings, perhaps a pension. A retiree relies on Social Security checks for only one-third of his/her income. The amount often depends on whether you begin taking your benefits before or after your full retirement age. The longer you wait to apply for benefits, the more the monthly payment will be.
If you have a company pension, benefits are often calculated based on salary and the number of years served. When you retire, you may be given the choice of taking payments monthly or in a lump sum. Unless you have excellent investment or money management skills, taking a lump sum payment may drain your retirement savings faster than you expect.
If you’re healthy and enjoy your job, consider working longer and retiring at a later age. You’ll have the opportunity to save more money for retirement and increase the amount of your Social Security benefits, when you do decide to take them.
Use savings calculators
How big should your retirement nest egg be? Our retirement savings calculator can help you come up with an estimate. Be sure to update your calculations regularly to take into account things like inflation and fluctuations in your savings..
Use money management tools
Don’t wait until retirement closes in to begin saving. Consider our tips above to start as soon as possible to make saving a habit.