Saving for retirement: Every little bit counts

Saving for retirement isn’t always the easiest thing to do, nor is it something that’s on everyone’s mind, particularly if you have a long way to go before you retire. And right now, amid coronavirus concerns, it might be even tougher to save — or you might even be tempted to put your retirement savings on hold. However, there are several reasons to consider staying the course, continuing to save, or even contributing more (if possible) to take advantage of currently low stock prices.

We’ve put together some tips to help maximize your retirement savings and set you on a path toward the retirement you envision.

 

Don’t delay

This may seem obvious, but one of the best pieces of advice is to act now, even if your contributions are modest. As the new year begins, many folks resolve to either adjust their plan or begin saving. If you are not taking advantage of your company’s retirement plan, it’s a great time to learn more about it and start to contribute. The more time you give your money to grow, the greater the returns are likely to be over time. Investing is a wonderful thing, and the power of compound earnings are what make a 401(k) one of the easiest and best ways to save for retirement. Compounding is the snowball effect of your money earning on top of earning, and the earlier you begin saving, the more time your money has to work for you.

For example, think of two people who earn the exact same salary of $40,000 annually and contribute the exact same amount (5%) into their retirement plans. Now let’s assume one of them began saving just 10 years earlier than the other. Assuming a 6% return, the person who’s been contributing 5% for 10 years longer than the other person could be looking at nearly $170,000 more in their retirement plan than the other, just by beginning slightly earlier and not delaying their retirement savings journey.

 

“Free money”

One of the distinct advantages of a company-sponsored retirement plan is that many offer a matching contribution. A matching contribution simply means that your employer contributes a certain amount to your retirement savings plan based on the amount of your own annual contribution. The match is one of the best parts, maybe the single best, of a 401(k) plan. If your company offers a matching contribution and if you are in a position to do so, try to take full advantage and contribute at least enough to gain the full benefit. If not, you are leaving “free” money on the table.

 

Avoid an early distribution

For many, cashing out your retirement plan once you leave your employer or even taking a hardship distribution or loan (if you are still employed and your employer offers such options) seems like a great way to solve a short-term money pinch. However, over a long period of time, the consequences of cashing out can be significant.

For starters, there is likely to be an immediate cost to cashing out a 401(k) in the form of federal and state income tax — and for those younger than 59½, a 10% early withdrawal penalty is also possible.

On top of getting hit with a fairly large tax bill, once you take that money out of your plan, that money is gone and can be very difficult to replace. As illustrated previously, the power of tax-advantaged accounts such as an employer-sponsored retirement plan like a 401(k) is that your contributions have the potential to compound without taxes eroding that growth. Over time, earnings can generate their own earnings, helping you accumulate retirement savings.

In summary, while it might be difficult to think of planning for retirement when it still seems so far off, it’s still wise to start saving today, take full advantage of employer-sponsored benefits, and keep your money in your retirement plan until you’re ready to use them for their intended purpose: living the retirement you always envisioned.



 

Financial Factoid

Once upon a time, there was a $100,000 bill.

Printed only from 1934 to 1945, the Bureau of Engraving and Printing made these gold certificates mostly for the purpose of business transactions between banks, according to the website Money Versed. Up until 1969, the U.S. mint also printed bills in the large denominations of $500, $1,000, $5,000, and $10,000.

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