Sometimes it’s hard to imagine being retired and not having to work to support yourself. Even though retirement may seem far away, it is critical to plan ahead for it. Saving for retirement is different than saving for the needs you have today, although both are necessary for good financial health. Saving for retirement requires setting money aside for the future when you will not be earning an income.
It is a good idea to calculate how much you might need to live on during retirement, so you can estimate how much you need to save each month. One often-used formula assumes you'll need 80% of your pre-retirement income to maintain your standard of living. Of course, the amount of money you put aside for retirement each month will increase over time as your income grows and as inflation drives up the cost of living. Retirement planning calculators are useful tools for determining expected income needs. A retirement calculator helps you determine how much money you will need for retirement, and whether or not your current savings contributions will be sufficient to cover those needs.
There are many different ways to save for retirement. If you have a salaried job, you may have access to an employer-sponsored retirement savings program like an employee pension. A pension is a type of retirement plan that provides a fixed monthly benefit to retirees who are no longer earning an income. They are often provided through trade unions, government offices or other organizations. Another employer-sponsored retirement plan is a 401(k), which allows you to contribute money from each pay check into a tax-deferred retirement account. (Tax-deferred means you won't pay taxes on that money until later, when you retire.)
If you are self-employed, or if your employer does not offer a retirement plan, you will need a more pro-active and disciplined approach to saving for retirement. There are a number of different tax-deferred savings accounts that allow individuals to set aside money in an independent account, like an Individual Retirement Account or IRA. There are also self-employed 401(k) plans offered through financial institutions. Another popular self-employed retirement plan is the Simplified Employee Pension, or SEP IRA, which allows you to contribute a percentage of your income to a retirement account. Keogh plans are similar to SEP IRAs but they allow you to contribute a higher percentage of your income each year and are more complicated to set up.
While there are multiple ways to save for retirement, the available plans and the conditions of the plans can change from year to year, so it is important to keep up with the most current programs. Most importantly, you should plan your strategy at a young age and stick to it.