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Saving for Retirement Early

Saving for Retirement Early

Saving for your retirement is one of the best things that you can do for your future. Everyone dreams of a retirement that is on the beach, or one with lots of travel, or even one where they are able to just relax and enjoy themselves without having to worry about money and all those other cares. But in order to reach this dream and have one of the best retirements that you can imagine, you need to start planning and that planning needs to happen early in your life.

There are way too many people who assume that they have all the time in the world to start saving for retirement. They may be in their 20s and assume that they have many years to get started so may as well put the money to the side for other uses. In their 30s, these same people are having children and growing a family and the retirement gets put on the backburner yet again. By the time these people have reached their 40s, they have wasted twenty years of payments and compound interest and are going to really need to work hard to get that retirement up to snuff by the time they want to retire.

If you have been considering retirement and aren’t sure where to start, it is good to talk to your local tax professional. No matter what age you are, they will be able to go over your options with you and help you to pick the one that will get you the most comfortable by the time you are ready to retire.

Understanding Compound Interest

Compound interest is one of the main reasons why you should consider starting your retirement plan as early as possible. When you make a contribution to your retirement plan, not only are you putting in your own money, along with contributions from your employer when applicable, but you are also earning compound interest every year on the account. This is going to make your money grow like crazy while in the account. The longer you have the money in the account and the more contributions you can make, the more that will be there when you reach retirement.

Seeing is believing when it comes to your compound interest. Consider sitting down with your local tax professional and discussing how compound interest can work for you. Compare the differences in your retirement amounts based on the expected rate of return and when you start saving. You will  notice that you can save thousands more by retirement just by starting the contributions a bit earlier, without any other changes.

Picking a Retirement Plan

When you are ready to get started with your retirement plan, you need to pick out which plan is going to best meet your needs. There are two main types of retirement plans; the traditional IRA and the Roth IRA. Both of them have their negatives and positives and the choice is often up to you.

With a traditional IRA, you will be able to put in contributions every year or every month and then get a tax deduction on this amount at the end of the year. This could help to lower your tax bill and save you some money. In addition, many employers offer this kind of retirement plan so you can get a matching contribution, saving up even more money by the time you reach your retirement age. Keep in mind that when you do retire and start to withdraw money from the account, you will be taxed, often in a new tax bracket and a higher tax rate than before so this may not save you the most money over time.

Another option is the Roth IRA. The main benefit of this option is that you will be able to save a lot of money over time. When you make the contributions, you are not going to get the tax break in the year that you make them. But, when you make withdrawals during your retirement, they are all going to be tax free. This is great because by the time you reach retirement, the tax rate is likely to be higher plus you will have lost many of your tax deductions by this time, so avoiding taxes can save a lot of money.

Every Little Bit Counts

What a lot of people don’t understand is that every little bit is going to help them out. You do not need to be able to max out your contribution amounts in order to get started, even though the more times you can max out the more money you will have at retirement. Even if you are only able to spare $100 a month for the first few years, this is going to add up to quite a bit by the time you reach your retirement age. Learn one or two things that you can give up each month, or start learning how to save, and you will be amazed at how much is going into your account over time.

Picking out a retirement plan doesn’t have to be a challenge. You just need to understand your options and get started with saving as soon as possible. When you are ready to start talking about your options and saving for that great retirement, contact our offices to speak with a local tax professional today.

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