Question: Why do people always talk about saving for retirement?
Advice from the Lab: Saving for retirement is tax-free, which is a better return on your investment than what you will get anywhere. Save 10% of your income for retirement.
While we recommend saving 10% of your income for retirement if you can, more important than saving 15% is contributing enough to get your match from your employer (if you get a match). When employers offer a match, they build this cost into the amount they are willing to pay you, often reducing your salary to give that match.
By not contributing, you are effectively saying “That’s ok, you don’t need to pay me as much as you wanted to. I’m fine with losing out on X% (whatever your match is) of my income”. Don’t miss out! Find out what your match is and set up auto contributions for that amount. Do this before paying off low-interest debt or saving for a rainy day.
If you don’t get a match, 401(k)s and IRAs are still the best vehicle for savings and investing available to Americans who are not already millionaires. In addition to being able to reap the rewards of investing in stocks and bonds, you also get the immediate return of not being taxed on the income you contribute. If you don’t have an employer-based retirement account, you can start one with as little as $1 a week with Honest Dollar.
Different retirement accounts allow you to choose when you do get taxed. Traditional retirement accounts are effectively like an interest-free loan from the government that you get to invest. For every $1,000 you put in, the government gives you an additional $150-$300 (by not taxing you) to invest. You have to pay that loan back (in the form of taxes) when you take it out of your retirement account, but you’ve earned interest on thousands of dollars for 30-40 years by the time you retire (and of course, you get back the money you saved).