The Best Retirement Savings Plan
The best retirement savings plan for you may differ from the savings strategy that fits someone else's needs. It often depends on how much money you can afford to save regularly, how you want to save it, as well as how much risk you are willing to take when it comes to investment options. A number of different factors should be considered in deciding which retirement savings plan will work successfully for you.
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Age
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Your age and the number of years until you retire are key factors you should take into account when planning how to save for your retirement. For a younger adult who still has many years until retirement, a company-sponsored retirement plan is a realistic place to start. The earlier you start saving, the less money you will have to invest to save enough for when you retire. One advantage is that you don't have to pay taxes on the contributions you make to employer plans. The earnings are tax-deferred until you begin withdrawing from the account. Another benefit is that employers usually match a percentage of the contributions you make. Employer-funded retirement plans also allow higher contribution limits than do individual retirement plans.
Developing a Savings Plan
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Two-thirds of Americans report that they are unable to meet their monthly retirement savings goal, reports a 2007 Bankrate retirement savings poll. Most of those surveyed listed other financial obligations as the reason for not saving more. However, automatic enrollment programs are making it easier for workers to participate in employer-sponsored retirement programs. If you contribute to a 401(k) or 403(b) plan at work, contribute at least enough to get your employer's match. If you want to invest more money but don't consider the investment options your company offers favorable, you can always open an individual retirement account. An IRA is an easy way to save, allowing you to contribute up to $5,000 a year. A number of tax benefits are available as well.
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Deciding How Much to Save
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Americans on average will need about 70 percent of their pre-retirement income to continue to maintain the same standard of living after they retire. To do this, you must save at least 10 percent of your gross income each year toward retirement. Prudential Financial recommends increasing the contribution you make to your retirement savings on an annual basis.
Investment Goals
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The level of risk you are willing to take can influence the investment goals you choose when it comes to saving for retirement. How much income you will need to save for your retirement will depend on how long you expect to live after retirement and the type of lifestyle you want to live in your retirement years. Although investments that involve greater risk are more likely to yield higher returns, you stand the chance of losing some or all of the money you invest along with any returns you've earned. When you are younger you can afford to take more risk since you have time on your side. However, as some people get closer to retirement age, they begin selling higher risk investments and then reinvest the money in lower risk options.
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References
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