Saving for retirement is an important financial habit. Most people don’t want to work forever. Even for those people, it’s a good idea to save money in case you can’t.
Saving for retirement is most important how Saving money also makes a big difference. With the right type of retirement account, you can save more consistently, pay less taxes, and ultimately have a bigger home.
A recent Motley Fool survey looked at the most common ways Americans save for retirement. If you’re trying to find ways to save money, here are the most common methods, the percentage of non-retirees who use each method, and which ones you should consider using yourself.
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1. 401(k), 403(b), defined contribution plans: 55%
Defined contribution pensions are the most popular way to save for retirement. People usually do this with a 401(k) plan provided by their employer. A similar type of plan, his 403(b), is available to employees of public schools and some nonprofits.
This is one of the best ways to increase your retirement savings. If you can set up a 401(k) with your employer, you should. A 401(k) has several valuable advantages.
- Saving is easy and automatic. You decide how much you want to contribute to your 401(k) account, and the contributions are paid directly from your paycheck.
- Help you save tax. Under a traditional 401(k), donations are tax deductible. Another option is Roth 401(k). In this case, the donation will not be tax deductible, but the withdrawal will be tax exempt.
- Many employers provide contributions up to a certain amount. Using business matching on your 401(k) can save you more money than doing it yourself.
2. Savings not in a retirement account: 52%
More than half of non-retirees save in non-retirement accounts. It’s kind of the default option, so it makes sense that many people save this way. If you don’t know where to put your retirement money, you can keep it in your savings for the time being.
However, it is not a good option. You can’t save taxes like you can with other retirement accounts. Also, if the money is in a savings account, it has very little growth potential compared to investing.
3. IRAs: 36%
IRA stands for “Individual Retirement Account”. This is an account that people can open themselves with most online stock brokers. If you use it for investment, you will save tax. In the IRA he has two types.
- Traditional IRA allows contributions to be deducted from income tax
- Not a Roth IRA, but can be withdrawn tax-free
These accounts are tax efficient and are another smart way to save for retirement. It works well in addition to a 401(k), so consider opening a 401(k) even if you’re already saving for retirement through work.
4. Defined benefit pension: 32%
Nearly one-third of non-retirees have defined benefit pensions. This is a retirement plan provided by your employer. Upon retirement, employees receive either a fixed monthly benefit or a lump sum.
A defined benefit pension is a good option if your employer offers it. In particular, a fixed monthly annuity provides stability in the form of predictable retirement income.
Other ways to save for retirement
The above method is the one used by the majority of non-retired people. In addition, 13% have other retirement savings, and 10% are saving through a business or real estate.
Alternative options like this are fine to supplement your retirement savings, but it usually shouldn’t be your only way to save. For most people, the safest approach is to stick to proven methods like 401(k)s and IRAs.
In summary, if your employer offers a 401(k) or defined benefit pension, start there. Do what you can to help her get the most out of her employer-provided 401(k). If you have money left over, invest it through an IRA or Roth IRA. You can also continue to invest through your brokerage account even if you have reached your 401(k) and IRA contribution limits.
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