The most important thing about saving for retirement is getting started. Everyone knows they need to save for retirement, but for some reason it’s easy to put off taking that initial first step and getting started.
Today I will go through five of the easiest ways to start building retirement savings. Even doing one of these five things will help you get started on your path to a well-funded retirement.
1) Start contributing to a 401k
If you work for an employer that offers a 401k plan and you haven’t opted in yet, that’s the first thing you should do to start building your retirement savings. Setting up automatic deductions from your paycheck is an essential part of an effective 401k plan, because then you don’t “see” the money in your account each month. Many employers offer dollar-for-dollar match up to a certain percentage, so make sure you are contributing at least that much.
If you are self-employed you can still get the benefits of a 401k. Many companies, such as eTrade and Charles Schwab, are happy to help you set up a self-employed 401k.
2) Start contributing to an IRA
A 401k isn’t the only way to build retirement savings. An IRA is another retirement savings account that you can contribute to regularly, up to a certain amount per year. A Roth IRA will allow you to build retirement savings tax-free, since contributions are made with after-tax dollars. That means when you withdraw funds in retirement you generally will be able to do so without reporting it as income.
Regular IRAs also have their advantages. Contributions made to a regular IRA are tax deductible. Taxes do come, though, when you withdraw funds during retirement. I personally prefer a Roth IRA because the tax rate is known. You can’t predict how high or low the tax rate will be when you retire and start making withdrawals.
3) Start contributing to an HSA
Contributing to a Health Savings Account, or HSA, is my favorite “little-known” retirement savings strategy. Funds you contribute to an HSA are tax-deductible and can be withdrawn and used for qualified medical expenses without incurring a tax penalty.
If you don’t need to use the funds for medical expenses, you can invest it once it reaches a certain level. Not only can funds be withdrawn at any time for qualified medical expenses, they also can be withdrawn in retirement as regular income. This makes the HSA work in much the same way as a traditional IRA.
4) Start investing in stocks in an individual investment account
Investing in retirement accounts aren’t the only way to build a nest egg for retirement. If you want more control over your savings or are already maxing out your 401k and/or IRA, you might want to consider opening an individual investment account. This way you can buy and sell pretty much any stock or mutual fund that you think will perform well over time.
One thing to keep in mind with an individual investment account is your purpose. If your purpose is to build up your investments until retirement, you will want to avoid buying and selling too often, otherwise you will cause you to rack up fees that cut into your gains. Instead consider a more conservative approach to individual investing, such as buying and holding index funds or ETFs. The Vanguard Total Stock Market ETF is a good example.
5) Buy a House
For a majority of people the purchase of a home will be their biggest purchase – and investment – of their lives. One of the great things about owning a home is that you build equity over time. Besides gaining equity in their home, homeowners also can typically assume their home will appreciate in price. Price appreciation is not guaranteed in the short-term, but over the long-term price appreciation is a pretty safe bet.
If you really want to get creative you can purchase a rental property. Having a rental property gives you additional exposure to the real estate market and allows you to build equity through your tenant’s rent checks. When you get closer to retirement you can either sell the rental house and extract the equity or continue to rent the house and use the rental income for living expenses. A word of caution: Being a landlord is a lot of work and owning a rental property may result in over-exposure to the real estate market.