Many younger adults are prioritizing paying off debts or saving for a home instead of saving for retirement. However, saving for retirement is crucial because investments can grow over time, and the longer the investing window, the more opportunity there is for wealth growth. A recent survey found that 49% of millennials and Gen Zers find saving for retirement difficult.
Individual Retirement Accounts (IRAs) are tax-advantaged accounts designed to help individuals save for retirement. IRAs were created by the US government in 1974 as part of the Employee Retirement Income Security Act (ERISA) to encourage people to save for retirement.
IRAs offer several benefits over traditional savings accounts, including tax-deferred growth, tax deductions, and more flexibility with investments. There are two primary kinds of Individual Retirement Accounts (IRAs): traditional and Roth.
A traditional IRA allows individuals to contribute pre-tax dollars to their accounts, reducing their taxable income for the year. Until the account owner withdraws it during retirement, the money in the account experiences tax-free growth. At that point, the funds are taxed at the account owner’s ordinary income tax rate.
A Roth IRA, on the other hand, allows individuals to contribute after-tax dollars to their accounts. The money in the account grows tax-free, and withdrawals in retirement are also tax-free. Roth IRAs can be a good choice for individuals who expect to be in a higher tax bracket in retirement than they are currently.
Individual Retirement Accounts (IRAs) could be a helpful solution for younger generations. IRAs are managed individually and don’t require an employer sponsor. You just need earned income to qualify. If you don’t have access to a 401(k) plan through your employer, you can open an IRA to save for retirement.
Making progress on retirement savings
To make progress on retirement savings, set up an automatic transfer from your bank account to your IRA every month. Putting IRA contributions on autopilot helps prevent spending and increases the likelihood of successful retirement savings. Automatic contributions are similar to how deductions are taken out of earnings automatically in a 401(k) plan.
According to a study by Charles Schwab, setting up an automatic contribution of just 1% of your income to a retirement account could help build your savings without putting too much of a strain on your budget.
Additionally, in your 20s, 30s, or early 40s, you may have other financial goals aside from retirement, but it’s important to focus on both goals at the same time. Waiting too long to save for retirement could result in a savings shortfall later in life. Starting to save for retirement sooner can reduce financial stress during retirement.
Many younger generations face difficulties saving for retirement, but opening an IRA and setting up automatic contributions could make it easier. By focusing on both short-term and long-term financial goals, younger generations can build a strong financial foundation and enjoy a comfortable retirement in the future.
