Setting up your retirement account: A step-by-step guide for beginners

Time can be deceptive. A retirement from the workforce, projected to happen decades from now, seems like a distant dream. That distance can deceive you into thinking that retirement savings aren’t a pressing issue. Today is the best time to use a retirement calculator to calculate how much you’ll need to walk away. Although the numbers may surprise you, getting set up is simple. We’ve broken it down into three steps below.  

1.Develop the right mindset to save for retirement

The first step in setting up a retirement account is to commit to saving money. IRAs and 401(k) plans are not checking or savings accounts that you can deposit and withdraw from. Once the money is in the account, it needs to stay there. That seems like a simple concept, but it’s often a stumbling block for first-timers. You need the right mindset to get started.

Commitment is only one part of this. It needs to be followed up by making consistent contributions to your retirement savings account. Automating those contributions by directly debiting them from your paycheck or bank account will simplify managing them. Depositing the funds manually can cause financial unmanageability.

2.Set a goal for weekly, monthly, and annual contributions

A retirement calculator can tell you how much money you’ll need to retire comfortably. The IRS tells you how much you can save each year. The maximum annual contribution amount for a 401(k) plan is $22,500 per year. The maximum for both traditional and Roth IRAs is $6,500. Those numbers go up to $30,000 (401k) and $7,500 (IRA) after you turn 50.

Regardless of age, try contributing the maximum allowed to your retirement accounts. Break it down into weekly, bi-weekly, or monthly increments, depending on your payroll cycle. 401(k) and traditional IRA contributions come out before taxes, so you’ll lower your tax liability and possibly put yourself into a lower tax bracket by making them.

Maxing out a 401(k) plan requires contributions of roughly $433 a week. That may seem like a lot of money. Think about the rewards at the end of the road. Retirement savings plans grow with investment returns, dividends, and compound interest payments. Consistent savings over several decades can create a substantial income after you retire.

3.Select funds for your traditional or Roth IRA

If your employer provides you with a 401(k) plan, the only decisions you need to make are how much risk you can tolerate and whether to roll over your plan when you change jobs (you do). Individual retirement accounts (IRAs) require a more active approach. You need to decide which funds to invest in (stocks, bonds, ETFs, etc). That can be challenging without a financial background.

The simplest model is 60/40, where you invest in 60% stocks and 40% bonds. The stocks can be ETFs, like the SPY fund that tracks the S&P 500. There are also several bond funds that give you a solid mix. Do some research or hire a financial advisor to help you with this. IRAs are a great way to supplement 401(k)s or can be a primary retirement fund for the self-employed.     

The Bottom Line

Setting up a retirement account can be overwhelming for beginners. Keep it simple. Make a commitment to save for retirement. Set a goal for weekly, monthly, and annual contributions. Choose your investment funds if you’re self-managing an IRA. Ask for help from a financial advisor if you need it. Once you’re set up, put your contributions on autopay and watch your retirement savings grow. You’ll be grateful for the effort when you retire.   


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