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Disclaimer: I am not a certified financial professional.  All articles and posts are opinions expressed by me, a contributor to the Common Cents Finance platform.  The information provided is not a research report or financial advice.  It should not be used as the basis to buy or sell a security, nor is it an offer to buy or sell a security.  This article generates revenue through affiliate commission at no cost to you.

According to CNBC, 21% of people have nothing saved for retirement, with an additional 10% having less than $5,000 saved. This is an ongoing issue for many.  Numerous people either do not understand the importance of saving for retirement or do not know where to start.  Typically, when people realize the importance of retirement saving or understand how to do it, it is a little too late.  

Saving for retirement is critical for everyone, regardless of their age.  It is the first step in guaranteeing financial independence later in life.  Also, it does not have to be complicated.  Saving for retirement can be as easy as a few swipes on your smartphone.

So, why aren’t more people saving for retirement?  I place no blame on these individuals for not starting their retirement savings.  Society as a whole fails to educate young people on financial literacy, which sets them at a disadvantage later in life.  This issue is brought to light very successfully in Robert Kiyosaki’s Rich Dad, Poor Dad, one of many excellent reads for any beginner in finance.

Younger people should not avoid retirement savings because of their age. In fact, they should look to do the opposite. Factors, like compound interest, can lead to greater amounts of wealth down the line. Saving now for retirement can allow someone to be able to live much more comfortably when it is time to stop working and enjoy life after their career.

How Much Do You Need to Retire?

Many experts believe that your retirement income has to be 80% of your pre-retirement salary.  So, if you were making $100,000 annually prior to retirement, you would need a yearly retirement income of $80,000.  Others have suggested that retirees have around $1 million saved or 12x their pre-retirement salary. If you want a better picture, click here to read my article on how much you need to retire. Otherwise, here is a brief overview.

What is the right amount for you?  That figure can vary based on a number of factors.  One of the largest factors is retirement expenses.  How much do you expect to spend once retired?  If you anticipate great amounts of spending, then you need to plan to have more savings for your retirement.  The opposite is also true.  With fewer expenses, the less is required for retirement.  So, what you need to retire varies on a case-to-case basis, as it really depends on your lifestyle.  To really get a better understanding of how much you personally need to retire, check out this retirement calculator from NerdWallet.

One of the greatest rules of thumb to follow is the 4% rule.  In retirement, it is suggested that you are able to withdraw 4% of your retirement savings yearly for living expenses.  Knowing this, you can better prepare for how you want your lifestyle to be in retirement. 

Regardless, you need to understand that you will most definitely require a large sum to retire comfortably. This figure can be anywhere greater than $1 million. This may seem overwhelming to some of you, but it is not that difficult to accomplish if you start as early as possible. So, my suggestion would be to start saving for retirement right now.

How to Start Saving for Retirement?

As stated before, many individuals tend to overlook or fail to acknowledge the importance of saving for retirement.  Retirement saving is crucial for financial independence later in life, and it is rather simple to start.  Society fails to demonstrate how important this actually is, which is why so many do not start at a young age as they should.

Due to the power of compound interest, saving small amounts at a young age can lead to massive amounts by the time you wish to retire. For example, if, at 20 years old, you were only to save $500 per year until you were 60, you would retire with close to $140,000. Although your contributions were only $40,000, you were able to multiply your investment tremendously by compounding.

So, put away as much money you can spare aside for the future. Do not worry about how much you put away. Like I just showed you, even smaller contributions can be very beneficial in the long-run. All you have to do is start as early as possible, and you will be thankful that you did.

Now that you know how much to save, you may be wondering where to put your money. There are a number of ways to begin your retirement savings, all of which provide their own unique benefits.  By knowing what options are available to you, you can be informed enough to make your own investment decisions and choose your own path towards a comfortable retirement.

What Plan Do I Use?

You might have heard terms like “IRA,” “pension,” and “401K” thrown at you when someone talks to you about retirement.  But, what do these terms actually mean, and how can you utilize them to plan for retirement?  

Don’t worry; I’m here for you.  These terms are just different retirement plans that you can use. Each provides its own unique benefits, so it would be in your best interest to learn what they are.

Luckily for you, that’s what this article is about. Here is a complete rundown of what retirement plans you should use, and how you can use them. If you want to know which of these are the best to use, click here to read my other article The 3 Best Ways to Save for Retirement.

Pick a Roth IRA

IRA stands for “individual retirement account,” and it is easily one of the best vehicles to plan for retirement.  I have written an in-depth article about IRAs that you can find here, but here’s a quick run-through.

An IRA itself is not an investment.  Like a checking or savings account, it is simply an account to invest. There are unlimited investment options with this plan, and the investments are all self-directed.  The individual has complete say in where the money is being invested. So, you would be able to invest in individual stocks, like Starbucks, Apple, and Tesla.

Roth IRA vs. Traditional IRA

For the sake of simplicity, there are two types of IRAs you need to know: Roth IRAs and Traditional IRAs.  A Roth IRA is the preferable option of the two.  It provides better tax benefits, especially for those at a younger age.  Contributions made to Roth IRAs are post-tax, meaning all gains made within your account are tax-free!

With a traditional IRA, all contributions made are pre-tax.  This means that the contributions are tax-free, not the gains.  This could be beneficial if you are in a high-income bracket currently and plan on being in a lower bracket when retiring.  

However, I recommend using a Roth IRA over a Traditional IRA.  In my opinion, the Roth has better tax benefits.  Also, it is hard to predict in which tax bracket you will be in the future, which makes using the Traditional somewhat riskier.  There are two other IRAs to note: Spousal IRAs and SEP IRAs, which are not too necessary to know right now.

The one drawback of any IRA is that you must be 59½ to begin withdrawals.  Otherwise, you will be penalized.  While this may deter those looking for early retirement, I would definitely suggest stowing at least some money away in an IRA.  The tax-benefits are too great to overlook.

Where Can I Open an IRA?

Unfortunately, at this time, Robinhood does not offer IRA or retirement options, but I would predict that this will change very soon.

Aside from Robinhood, basically every major brokerage offers IRA options.  The brokerage WeBull supports IRAs, and they provide commission-free trading and two free stocks when you sign up and deposit $100.  If you are interested in creating an IRA and collecting two free stocks with WeBull, click here to sign up.

Betterment is another trading platform that offers IRA options.  The platform also offers a high-interest savings account, which could also be an interesting option for an emergency fund.  It should be noted that, while Betterment is commission-free, they do charge a yearly fee of 0.25%.  If you are interested in creating an account with Betterment, click here.

If you do not want to use WeBull or Betterment, there are other options available.  Brokerages, such as Fidelity and Charles Schwab, also offer IRAs.  So, feel free to do your own exploring to see with which brokerage you’re most comfortable.

Look into a 401k

So, a 401k is different from an IRA, but it is still a great option for retirement investing.  I have also written a more in-depth explanation about 401ks in another article, which can be found here.  

Regardless, here is a quick explanation.  A 401k is an investment account that is a deferred contribution plan, which are company-sponsored retirement plans that offer different benefits and drawbacks than an IRA.  This plan is specifically for private-sector employees and is tax-deductible and tax-deferred.

The greatest benefit of a 401k is an employer matching program.  For some companies, the employer may match all contributions made by an employee up to a certain percent.  For example, if a company were to match half of an employee’s contributions up to 6%, the company would pay an additional 3%.  So, if you were making $100,000 and contributed $6,000 (6% of your salary), then the employer would contribute an additional $3,000 (3%).  This means you would essentially get paid for planning for your retirement.

Plus, some companies even provide Roth 401ks, which provide the same tax benefits as a Roth IRA.  In that case, you would be paid to invest and not be taxed on your gains!

So, what’s the drawback?  Well, investments in a 401k are not as limitless as an IRA.  Typically, companies limit the investment options to a select few mutual funds and stocks.  Also, like the IRA, you cannot start making withdrawals until you are 59½.

How Do I Open a 401k?

Unfortunately for most people, you cannot open a 401k account unless your employer offers it.  If they do, they will be able to walk you through their process.  Most likely, they will use a brokerage, such as Fidelity or Charles Schwab. 

If you do not work for an employer that offers a 401k option, then you will be unable to open an account.  If you are a public sector employee, you may be able to invest in a 403b or 457 plan.  Both plans are almost identical to the 401k and offer essentially the same benefits.

If these options are also unavailable, you would have to look elsewhere for retirement planning.  In this case, you could really take advantage of your IRA, since you can open it on your own.

However, there can be one way to open your own 401k.  If you are self-employed, you could take the necessary steps to create your own 401k.  This may be a more lengthy process and not too practical since not everyone is self-employed.  Regardless, this could be helpful to those who could follow the necessary steps.

Collect a Pension

A pension is probably the most well-known retirement plan.  It is typically associated with government employees, like teachers, firemen, and police officers.  However, some private-sector companies also offer their own pension plans. 

For these plans, employees need to pay into them, unlike an IRA or 401k.  The employer also pays into this plan, usually covering most of the costs.  So, when you retire, you would receive more money contributed by your employer than by you.

The payments are annual, and the distribution amount varies based on several factors (i.e. longevity of employment, years of contributing to pension). The payment amounts will be more in total than what was contributed to the pension plan.

For example, a teacher could have contributed $200,000 to their pension over the course of their career.  With these contributions, they could potentially retire with a distribution payment of $50,000 per year, which would end up being worth more than the made contributions.

The greatest drawback of this plan is that it does not adjust for cost-of-living, which means that the distribution payments are flat.  With other plans, you could direct the investments and assure that they will outpace inflation.  Also, you are unable to open your own pension; it must be offered through an employer.

Due to the nature of these plans, they are falling out of favor with many employers.  Simply put, many are unable to guarantee these distribution payments to retirees.  As a result, pension plans are rather hard to come across for private-sector employees.  However, if your company were to offer it, consider it a gift.

What If I Want to Retire Early?

Welcome to the FIRE Movement!  FIRE is an acronym used by individuals that wish to retire early that stands for financially independent, retired early. Young people have taken tremendous measures to make an early retirement a reality.

Can it be achieved? I definitely believe so. However, tremendous sacrifice and/or significant hard work are required to make it happen.

I have seen people live in trailers and only use bicycles to avoid the accompanying expenses. These individuals go through tremendous lifestyle changes, in order to retire significantly earlier than the average. I’ve seen people retire as early as 30 using these methods.

Why is FIRE Becoming So Popular?

According to a 2018 Gallup poll, the average American believes they will be able to retire by 66 years old, which is up from 62 years old since a 2002 poll. Further, the average retirement age in the US has increased since the 1990s. For men, it is now 64, an increase from 62; for women, it is 62, an increase from 60.

With the average age of retirement only increasing, many young individuals are trying to break the mold. They no longer want to work 40-hour work weeks for 40 years only to enjoy retirement for a few years.

Let’s assume that you are able to retire on schedule, somewhere in your mid-60s. The average age of death in the US is roughly 78 years old. So, even if you retire on time, you would only be able to enjoy 10-15 years of it. That is if you do not get sick or experience some unfortunate circumstances in that time period. The later you retire, it appears the shorter the window for you to enjoy freedom.

With that said, it is clear why the FIRE movement is gaining momentum. There are numerous benefits of retiring early, and there are also several drawbacks. So, if you plan on attempting to follow this movement, it would probably be best to understand the pros and cons of doing so. If you are interested in learning more, I wrote a detailed article that you can read here.

Plan Accordingly

One thing you need to realize is that you cannot fully benefit from retirement accounts if you plan to retire early. You cannot withdraw your investments from either an IRA or a 401k until you are 59½. If you were to do so, you would be penalized and have to pay taxes on the withdrawal.

Thus, you need to plan accordingly. Utilize different investment accounts to properly plan for retirement. In this case, you could use Robinhood to open a non-retirement account. If you choose this method, you will receive one free stock when you create an account. To open a Robinhood account and collect that free stock, click here.

In a non-retirement portfolio, you could invest in dividend-paying stocks, which would provide monthly cash flow. This could provide you a means of living comfortably in your retirement. If you are unfamiliar with how dividend stocks work, you can watch my YouTube video on the 5 Reasons on Why You Should Start Dividend Investing Now!

You could also utilize other investment strategies, such as investing in real estate. This too would provide a great source of cash flow for retirement living. To learn more about this approach, you can read an article I wrote about it here.

Final Takeaway

The amount needed to retire varies from person to person. Using a retirement calculator could help you figure out how your own goal. Regardless of how old you are, you need to start planning for your retirement. Even if you are young, it is never too early to start. In fact, starting earlier is actually better as it allows you to benefit from compound interest.

At a young age, putting away small amounts of money for retirement can be more than enough when the time actually comes. All you need to do is stow away these savings in the retirement account of your choosing. This would either be an IRA or a 401k. You definitely do not have to limit yourself to one account. Actually, I would suggest that you take advantage of both the tax benefits of a Roth IRA and the matching programs of a 401k. You can also benefit from a pension plan if your employer provides it. If you want to open an IRA, you can do so with WeBull or Betterment.

You could also attempt to retire early and follow the FIRE movement. Doing so would require a lot of hard work and sacrifice, but I believe it can be achieved. One thing to note is that you will not fully benefit from these retirement accounts, as you will be retired much before the minimum withdrawal age. In this case, plan to use a non-retirement account for investments, because there is no penalty for withdrawals.

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Post Author: Anthony Crincoli

Anthony is the Founder and Lead Content Creator for Common Cents Finance. Away from the platform, Anthony is a CPA Candidate and an auditor for a Big Four public accounting firm. He has a passion for personal finance and looks to promote financial literacy whenever and however he can.

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