To be financially secure in retirement, you should start saving for retirement as early as possible. By doing this you will not only be able to take maximum advantage of the power of compound interest, but also develop the habit of putting away some money for your retirement. Keeping this in mind, here is some information on this topic.
Why You Should Start Early
One of the easiest ways to boost your saving for retirement is to leverage the power of compound interest. However, to enjoy the full benefits of compound, you should join a pension plan as early as possible. To illustrate this point, say you start depositing $5,000 into a pension plan that pays 6% annual interest. By the time you hit retirement age (67), your pension will be up to $500,000 higher than someone who joined the scheme 10 years later, assuming you both contributed the same amount annually and earned the same interest over the said period.
Types of Retirement Accounts
Today, retirement accounts come in many different flavors, designed to cater to the needs of different individuals. Examples of these accounts include, among others, the traditional IRA, Roth IRA, 401(k), 403(b), and 457 retirement accounts. However, it is worth noting that your account options will largely depend on how and where you work. More specifically, big, for-profit employers are likely offer a 401(k) scheme whereas smaller and not-for-profit employers are unlikely to offer a 401(k) scheme. Examples of the latter category of employers include charities, religious, and schools.
Catch-up Contributions
At this point, it is important to note that both Roth IRA and 401(k) plans have contribution caps aimed at people under the age of 50. However, thanks to something called catch-up contributions, you can still save a significant amount of money even if you had not previously been depositing a substantial amount of money into your pension plan account. For the 2020 fiscal year 2020, the catch-up contribution limits for persons 50 years or older is $1,000 and $6,500 for IRA and 401(k) pension accounts, respectively.
Conclusion
To ensure your pension is able to cater to your financial needs in retirement, you should join a pension scheme as early as you can. This will allow you to develop a habit of saving money and leverage compound interest to grow your pension over time. After the age of 50, you can use catch-up contributions to boost your pension.
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