Young people in their 20s and 30s typically don’t have retirement at the top of their financial priorities. They have enough to worry about with figuring out their career path or getting a mortgage. However, 20-somethings can put themselves at a significant advantage by saving up early. This guide will show five things to know about retirement savings in 2023.
Setting up Savings
Some people ask when the best time is to start saving for retirement. The answer is right now. An ideal time to begin retirement savings is in a person’s early 20s when they get their first job after school, whether secondary, post-secondary or vocational. Millennials and Generation Z may have other things on their mind. Still, early saving gives them the benefit of compounding interest.
The owner’s funds will increase over the years in a retirement account because of interest. So putting away money now means there is more time for the funds to grow, even if it’s a tiny proportion of each paycheck. Young people without a mortgage or children may find this time easier for retirement savings, providing an excellent opportunity to get ahead. A recent survey found 31 was the average starting age for retirement savings. Beginning early leaves decades of interest building.
Considering Fund Type
Saving for retirement can seem intimidating, but it’s relatively simple. There are multiple ways young people can save for retirement, and they typically include these funds:
- 401(k): Employees working full-time may be eligible for retirement benefits with their employer. They’ll likely enroll with a 401(k) program because they’re the most convenient. Workers with a 401(k) contribute a portion of their paycheck. The employer may match those contributions as an incentive for the employee to stay. It’s an ideal way to save for retirement for those with retirement benefits.
- IRA: Another type of retirement fund is an individual retirement arrangement (IRA). This fund typically requires the user to manage the funds themselves. They’re beneficial for workers who don’t have employer-sponsored retirement plans. The plan is similar to a 401(k), except the contribution limits are lower. IRA and 401(k) contributions grow tax-free, but the IRS will tax withdrawals.
- Roth IRA: An IRA alternative is a Roth IRA. This retirement fund is similar to a traditional IRA but differs primarily in taxes. Traditional IRAs give a tax deduction, but a Roth IRA account doesn’t provide the tax break. The IRS taxes Roth IRA contributions now. So, retirees can withdraw money tax-free once they reach 59.5 years old if their account is five years or older.
Rising Contribution Limits
Saving for retirement is an excellent idea, but there are limitations to how much people can contribute yearly. Unfortunately, lottery winners with newfound riches can’t pour their millions into their 401(k) or IRA accounts. In 2022, the 401(k) contribution cap was $20,500. However, that number will increase in 2023. This year, retirement contributions can now reach $22,500 annually. The IRA contribution limit will increase from $6,000 to $6,500.
Finding a Retirement Location
Though retirement is a few decades away, now is a terrific time for young people to think about where they want to retire. Housing costs are increasing, and there’s no telling when they’ll ever come back down. The cost of living will affect how young people save for retirement and how they live once they retire.
Once they reach retirement age, many seniors look for retirement communities. These facilities are a popular option for people who want to be around others near their age and have a sense of security. Saving for retirement now means these communities are more affordable as people age. Some seniors age to where they’ve outlived their finances, even if they started saving early. The best option for them is to find a retirement community that provides ongoing support for the elderly.
IRA and 401(k) accounts are practical, but young people don’t have to stop there. They can utilize other ways to diversify their portfolio and set themselves up nicely in retirement. Diversifying includes many options, but some of the most popular are stocks, bonds and investment funds. These methods increase retirees’ money, allowing them to take that trip to Italy they’ve always wanted.
One prominent strategy for diversification is using investment funds. They may include exchange-traded, mutual and index funds, among others. Some funds require active management by the account holder, but index funds are passive and let the money grow over time.
For example, an investor can use their index fund to track the S&P 500. The fund provides broad diversification, considering the investment is in 500 companies. A few stocks poorly performing won’t wreck the investment. Though they’re simple, index funds can bring significant returns. Even Warren Buffett swears by this investment strategy. The billionaire credits the inexpensive nature, less trading and tax advantages for the success.
Considering Retirement at the Start
Young professionals who just got their degree likely won’t see retirement for four decades or more. However, now is an excellent time to start saving. Financial obligations like children and mortgages will make retirement saving much more difficult. Starting now allows today’s Millennial and Gen Z adults to let their money compound as much as possible with interest. These five tips show what to know about saving for retirement in 2023.