Step #4: Invest 15% Of Your Household Income Into Retirement

21 April 2017 Published in Blog

Now that you understand the basic investing terms, your first actual investment is going to be one in your future. Experts recommend allocating 15% of your monthly income toward retirement.

Before you start exploring your options, though, you’ll need to set a goal, or a target number. This number will represent how much you need to have saved for living comfortably and independently throughout your retirement. A good way to set a target number is to take your current living expenses and multiply that by 400. This will give you the amount you’d need to have to sustain yourself, based on a 4% investment return.

There are many investment options to consider for retirement. The most common are 401(k)s, IRAs and Roth IRAs, each of which have their own strengths and weaknesses.

Here’s what you’ll want to look for:

1.) Matching funds

This refers to matching monies offered by employers. Most will offer to match your contributions up to a certain limit. For example, your employer may offer a 100% match on the first 3% of your salary. If you earn $60,000, that means for the first $1,800 you have withheld from your paycheck and put into your retirement account, your employer will gift you an additional $1,800 in completely tax-free money. Even if all you do is park that money in something stable like a trust fund, it’s the highest, safest, most immediate return you can earn anywhere in the stock market. Don’t leave free matching money on the table!

2.) Tax-deferred growth

If a retirement vehicle is tax-deferred, this means all the assets parked in that particular fund will not be taxed until they are withdrawn. This allows the money to grow, untouched, for years.

3.) Tax-deductible

If a retirement fund is tax-deductible, every dollar you put into that fund is subtracted from your taxable income, automatically lowering your taxes. For those in their peak earning years, this can provide considerable tax savings.

In the table below, we offer a brief summary of the pros and cons of each retirement vehicle for easy comparison.
 
Features/requirements 401 (k) IRA Roth IRA
Matching Funds Yes No No
Tax-deductible Yes Depends on income, tax-filing status and other factors No
Tax-deferred Growth Yes Yes No
Taxable Withdrawals Yes Yes No
Maximum Yearly Contribution (2017) $18,000.00 $5,500.00 $5,500.00
Maximum Yearly Contribution Age 50+ (2017) $24,000.00 $6,500.00 $6,500.00
Age Limit For Contributions None 70 1/2 None
Income Eligibility (2017) Any income earned through a company that offers a 401(k) Any earned income as reported on a W-2, wages from self-employment, tips and alimony Any income with a gross worth of less than $118,000-$133,000/yr or $186,000-$196,000/yr for taxpayers filing jointly

 

Once you have chosen your retirement fund, you’ll need to choose somewhere to invest the money. Low-risk investment vehicles, such as federal bonds or trust funds, are usually the best choice.

If you are saving for retirement through the use of a 401(k), be sure to check if your employer offers a target date fund.

The term “target date” refers to your planned retirement date. You’ll know your employer offers a target date fund if there’s a calendar year in the name of the fund, such as A.J. Holdings Retirement 2050 Fund. Simply make an estimated guess of the year you’d like to retire, and then pick the fund with the date closest to your projected retirement.

A target date fund is a smart choice because it spreads the money in your 401(k) across many asset classes such as large company stocks, small-company stocks, bonds and emerging-markets stocks. Then, as you near the target date, the fund becomes more conservative, owning less stocks and more bonds, automatically reducing your risks as you near the date of your retirement.

To get the ball rolling on whichever retirement plan best suits your needs, you’ll need to speak to an HR representative at your workplace. With a bit of work and a lot of planning, you’ll have your future secured in the best way possible.

What steps have you taken toward securing your future? Share your retirement plan with us in the comments!

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