If you’re self-employed, it’s easy to put retirement planning on the back burner, with everything…
If you want to have a comfortable retirement someday, it’s important to start planning early. By putting money away starting at an early age, you allow compound interest to work for you. Here are some general tips that can help.
Einstein called compound interest the “Eighth Wonder of the World.” When you’re saving for retirement, it’s crucial to start saving early and regularly. If you save $100 per month, every month, with 7% compound interest, at the end of 30 years you’d have $122,708.75.
But if you wait 10 years to start saving, you’d end up with $52,396.54, less than half as much.
Use these calculators to determine the compound interest on your savings.
How hard is it to save $100 per month? Not as hard as you might think. One tactic that many people find helpful is to set up an automatic payroll deduction, so that regular amounts are sent from each paycheck directly to your 401(k) or IRA.
You could have $25 taken from each weekly paycheck, or $50 from each check if you’re paid every two weeks. If you don’t see the money in your bank you’re less tempted to spend it.
You should also consider the tax savings. Contributions to 401(k)’s and traditional IRAs are tax-deferred, so that your taxable income is lower by the amount you contribute. If you contribute $100 monthly to a tax-deferred savings account, and you’re in the 15% tax bracket, your tax bill is lowered by $15 per month. That’s $15 less you would have to pay to Uncle Sam.
The Saver’s Credit can be worth up to $2,000 in tax savings ($4,000 if married filing jointly) depending on your taxable income. In 2015, the income limits were $30,500 for singles, $45,750 for heads of household, and $61,000 for married filing jointly. By filing form 8880 with your tax return, up to 50% of your contribution to a retirement plan or IRA can be credited.
Many employers will match contributions to 401(k)’s or other savings accounts. If your employer matches each dollar, then you only need to put away $50 each month in order to get $100 in savings. Even if your employer only matches 50 cents, you only need to come up with $66 to get $100 in savings.