An individual retirement account (IRA) is a very popular way to save for retirement, especially if you don’t have access to a workplace retirement account such as a 401(k). While there are several important decisions to make when saving with an IRA, such as how to invest your money, the most important step when it comes to saving with an IRA is funding it. If you don’t put enough money into your account while you work, even a lot of smart investments won’t give you enough money to retire on. Although there will be a hard limit of $7,000 on contributions to an IRA each year beginning in 2024 ($8,000 if you’re over 50), there are ways you can maximize your IRA contributions until then. Here are three tips from financial services firm Vanguard on how to get the most money into your account.
For more help with retirement savings, consider matching with a vetted financial advisor for free.
Tip one: contribute early
In the long run, this can be the most important step in having enough money to fully fund your retirement. When you contribute early, you can benefit from compound interest.
We can show how important this is with SmartAsset’s investment return calculator. For simplicity’s sake, let’s say you invest $1,000 and have a 4.00% return. If you put that $1,000 in at age 20 and take it out 30 years later at age 50, you have $3,243, a growth of $2,243. Now let’s say you don’t put it in until age 30 and you’re still taking it out at age 50. Your investment is only worth €2,191, more than €1,000 less.
Apply this to the larger scale of retirement savings and you see a serious missed opportunity if you wait to save. Retirement may seem a long way off in your 20s, but it’s crucial to save as much as you can early so you can take advantage of this compound growth.
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Tip two: use automatic contributions
Setting aside a large chunk of money at one point in the year can be intimidating; it seems like you are losing a lot of money. And as important as retirement savings is, it’s understandable that in a world where prices are rising, putting away a lot of money for the future can be too painful.
To get around this psychological barrier, consider using automatic contributions. Vanguard notes that to reach the $6,500 limit, you could set aside $542 each month. If you can’t afford that yet, you can also set up automatic increases. You can set up your account to withdraw €200 per month for the first year and increase that to €300 after twelve months.
Tip three: make investment decisions
Don’t simply let your money sit in your IRA as cash. Saving is great, but you’re unlikely to achieve your goals if you don’t take the time to make smart investment decisions at the same time.
Target date funds are a good option for retirement savers, but any indexed fund will work. Indexed funds track the market, so as long as the market grows over time – even if there are periodic dips – you’re in good shape.
It comes down to
Using an IRA is a great way to save for retirement. You can put up to $6,500 into your IRA each year — $7,500 if you’re 50 or older — but there are ways to ensure you get the most out of your retirement savings, such as investing early to take advantage of compound interest and make smart investment decisions quickly.
Retirement planning tips
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A financial advisor can help you make sure you’re on the right track with your savings plan. Finding a financial advisor does not have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors. And you can interview your advisor matches for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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If you happen to have access to a 401(k), make sure you take advantage of any employer match that is available to you. This is literally free money, and you don’t want to leave it on the table.
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Have an emergency fund on hand in case you encounter unexpected expenses. An emergency fund should be liquid – in an account that is not at risk of significant fluctuations like the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But with a high-interest account, you can earn compound interest. Compare savings accounts from these banks.
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