Retirement Savings Basics: Start Now for a Secure Future

Planning for retirement might seem far away, especially if you’re in your 20s or 30s. But the choices you make today will shape your future financial security. Let’s break down the basics of retirement savings, so you can take control of your future.

The Magic of Starting Early

Time is your biggest advantage when saving for retirement.

Thanks to compound interest, money you save now will grow much more than the cash you save later. This happens because you earn returns not just on your original investments, but also on the growth of those investments.

“The power of compound interest cannot be overstated when it comes to retirement planning” explains Scott Mass, Senior Vice President, Investments at David Lerner Associates. “Every five years you delay starting your retirement savings could reduce your final nest egg. The best time to start is always now.”

Consider this example: If you save $200 monthly starting at age 25, you could have over $1 million by age 65 (assuming a 7% average return). If you wait until 35 to start, you’d need to save $400 monthly to reach the same goal!

Even small amounts add up. Saving just $50 per month now can grow to tens of thousands later.

Understanding Retirement Account Types

You have several options for where to put your retirement savings. Each has different tax benefits.

401(k) Plans:

• Offered by employers
• Money comes out of your paycheck before taxes
• Many employers match part of your contributions
•  Annual contribution limit in 2025: $23,500 (plus $7,500 more if you’re over 50)
• You’ll pay taxes when you withdraw the money in retirement

Traditional IRA:

• Anyone with earned income can open an account
• Contributions may be tax-deductible depending on your income
• Annual contribution limit in 2025: $7,000 (plus $1,000 more if you’re over 50)
• You’ll pay taxes when you withdraw the money in retirement

Roth IRA:

• Contributions are made with after-tax money
• Growth and qualified withdrawals are completely tax-free
• Annual contribution limit in 2025: $7,000 (plus $1,000 more if you’re over 50)
• Income limits apply for eligibility

Roth 401(k):

• Growing in popularity with employers
• Contributions are made with after-tax money
• Qualified withdrawals are tax-free
• Same contribution limits as traditional 401(k)

How Much Should You Save?

Many experts suggest saving 15% of your income for retirement, including employer matches. If that seems impossible, start with what you can and increase it over time.

To determine your personal goal, consider:

1. Your desired retirement lifestyle
2. Expected retirement age
3. Other income sources like Social Security
4. Healthcare costs
5. How long you might live (many people now live into their 90s)

An online retirement calculator can help you get a more specific number. Remember that inflation will make things cost more in the future, so today’s dollars won’t go as far.

Building a Diverse Retirement Portfolio

Inside your retirement accounts, you’ll need to choose investments. For most people, a mix of stocks and bonds works best. Talk to your investment counsellor for information and advice.

Stocks: Higher risk but higher potential returns. Good for long-term growth.

Bonds: Lower risk but lower potential returns. Add stability to your portfolio.

A common rule of thumb: subtract your age from 110. That’s the percentage to consider putting in stocks. So, if you’re 30, about 80% in stocks and 20% in bonds might be appropriate.

Many people choose low-cost index funds that track the overall market rather than picking individual stocks.

Target-date funds are another popular option. These automatically adjust from more aggressive to more conservative as you approach retirement age.

Balancing Retirement with Other Goals

Retirement is important, but you likely have other financial goals too. Here’s how to balance them:

1. First, get any employer match in your 401(k).
2. Build an emergency fund of 3-6 months of expenses.
3. Pay off high-interest debt like credit cards.
4. Then, boost retirement savings while also working on other goals like home ownership or college for kids.

Remember that while you can borrow for education or a home, you can’t borrow for retirement.

Catching Up If You’re Starting Late

If retirement is getting closer and you haven’t saved much, don’t panic. You can still improve your situation:

• Max out catch-up contributions in 401(k)s and IRAs after age 50
• Consider working a few years longer if possible
• Look for ways to reduce future expenses
• Develop skills for part-time work in retirement
• Delay taking Social Security to increase your benefit

Even late starters can make significant progress with focused effort.

Take Action Today

The most important step is to start now, even if you start small:

1. If your employer offers a 401(k), sign up today
2. At minimum, contribute enough to get any employer match
3. If no 401(k) is available, open an IRA
4. Set up automatic contributions so you don’t have to think about it
5. Increase your savings rate by 1% each year
6. Review your investment choices annually
7. Avoid withdrawing retirement money early

Remember that retirement savings is a marathon, not a sprint. Small, consistent actions today will create financial security tomorrow.

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Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable– we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.