By Michelle Fox and Carmen Reinicke - CNBC + Acorns
While we all know you need to save for retirement, when the time comes, many fall short: More than half of U.S. workers ages 40 to 73 have less than $ 50,000 set aside for their golden years, according to a survey. from the Insured Retirement Institute.
In order to stop working, you have to make sure you save enough.
The general rule of thumb is at least 15% of income, but if that's not possible, any amount helps.
The most popular way to save is an employer-sponsored system, usually through a 401 (k) plan, although not everyone has this possibility.
In 2020, only 33% of workers in private industry did not have access to this plan, according to data from the Bureau of Labor Statistics.
Part-time workers, those in service industries, and those earning the lowest wages were the least likely to have any help from their employer.
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Fortunately, there are other alternatives, such as having an individual retirement account (IRA) or investing in the market.
These are the factors to consider when determining the best option for your situation.
Company sponsored plans
In a traditional company-sponsored retirement plan, typically a 401 (k), contributions are automatically deducted through your payroll, before taxes.
In this way, you will have a lower annual taxable amount, which is the income on which taxes are calculated at the end of the year.
This does not mean that you will not pay a fee for these funds - you will when you withdraw them at the time of retirement.
The amount to be paid will depend on your tax level at that time.
The big advantage of the 401 (k) is that you can save up to $ 19,500 in fiscal year 2021, regardless of how much you earn, says personal finance expert Chris Hogan, author of
Retire Inspired
and
Everyday Millionaires
.
Your business may also offer a Roth 401 (k) plan.
This system discounts after-tax contributions, and you will not be charged for withdrawing your retirement.
Hogan prefers the Roth 401 (k).
"That's saving nearly $ 20,000 tax-free every year," he explains.
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If your business contributes a certain percentage of your 401 (k) plan, try to contribute at least up to that percentage as well, advisers say.
The company's money will be accounted for without taxes, regardless of whether its contributions are taxed or not.
When you turn 72, you'll need to start making a minimum annual distribution, or RMD, from your 401 (k).
Private retirement accounts
The first adviser recommendation for those without a 401 (k) is to open an individual retirement IRA, in which you establish your own Roth-type contributions that deduct the money after taxes.
Thus, when withdrawing funds to retire, there is no longer a fee to pay.
Tess Zigo, a certified financial planner at Emerge Wealth Strategies in Lisle, Illinois, says this account is ideal for young investors, as they tend to have low taxes at the start of their career and higher at the end.
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People who use a Roth IRA can save a good amount of money each year.
In 2021, they can save up to $ 6,000 or $ 7,000 if they are 50 or older.
Of course, there are some limits.
To qualify, in 2021, you must have modified adjusted gross income less than $ 140,000 for single filers and $ 208,000 for married filing jointly.
If you have taxable income, you can also save for retirement in a traditional-type IRA, which allows you to defer taxes, like a 401 (k) plan.
This system makes sense for those who are in a time when they pay high taxes and expect them to be lower in the future, when they want to retire.
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In 2021, the contribution limit for a traditional IRA is $ 6,000 or $ 7,000 if you are age 50 or older.
One of the advantages is that investors can have more freedom in deciding how to invest their money in these accounts than in a 401 (k).
They can select their own stocks, bonds, mutual funds, exchange-traded funds, among others.
Of course, there are risks when trying to deal with changes in the market and have a balanced portfolio.
Regular investment accounts
If you don't want to open an IRA, you can also save for retirement in a traditional brokerage account, where you can invest in the markets so your money grows over time.
This option would give you the most freedom in terms of how much you contribute and how much you withdraw, but it also means that you would not get the tax benefits that an IRA account has.
If you trade and trade frequently on a regular brokerage account, you could be hit by a large tax rate, something that won't happen if you use a Roth IRA.
"The only thing better than compounding is tax-free compounding," says Rob Greenman, CFP and chief growth officer and partner at Vista Capital Partners in Portland, Oregon.
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The advisers indicate that the important thing is to start saving in an investment system, even in small amounts, as soon as possible.
Compound interest in investment accounts makes money grow much more than in savings or checking accounts.
"You get interest over interest," says Tess Zigo, financial planner at Emerge Wealth Strategies.
This article is part of the
Invest in You Ready series.
Set.
Grow
(Invest in you: Ready. Done. Grow), an initiative of CNBC and Acorns, the microinvestment app.
NBC Universal and Comcast Ventures are Acorns investors.
