This post was written by Anna Helhoski.
Squirreling away money for retirement may not be your top priority when your budget is dominated by the here-and-now factors. But if you hope to have the same amount saved as your male counterparts come retirement age, you’ll need to save a higher percentage of your income and start as early as possible.
Women are no slouches when it comes to retirement savings — at all income levels, they save 7% to 16% more than men do in retirement accounts, according to a 2015 study by the investment giant Vanguard. But because of the gender wage gap, Vanguard says, the amount of money in retirement accounts held by men is over 50% larger, on average, than women’s savings.
Step one: Open an account
To kick off savings, open a retirement account. An employer-sponsored 401(k) is the best starting point if your employer matches some contributions because that’s free money. Make sure you’re at least contributing enough to take full advantage of the match. If your employer doesn’t offer a match, you may want to consider opening an individual retirement account and maxing out contributions there first.
Also, consider a Roth IRA, which is funded with after-tax contributions that allow your money to grow tax-free. With Roth IRAs, the key way to take advantage of compounding is to start early. You can see how much your contributions will grow from now to retirement by using this Roth IRA calculator. It’ll give you a better sense of how much to save each month to reach your retirement goals.
Typically, experts recommend saving 15% of your income each year for retirement. You can contribute up to $5,500 a year to a Roth IRA until you are 50, then you can contribute up to $6,500 annually.
Roth IRAs have two key benefits compared with other retirement accounts: taxes and withdrawals. At retirement you won’t be taxed on your withdrawals, unlike a traditional IRA or a 401(k) in which contributions and returns are tax-deferred.
In addition, a traditional IRA and 401(k) both tack on a 10% penalty for any withdrawals before age 59½. Although you should give careful consideration to any withdrawals before retirement, if you’re in an emergency money crunch and need to dip into your retirement nest egg there are no penalties for early withdrawal of contributions from a Roth IRA account.
What to look for in a Roth IRA
When searching for a Roth IRA, find a provider that offers: low or no account fees, low account and investment minimums, a large selection of no-transaction-fee mutual funds and commission-free exchange-traded funds, customer service and education resources for new investors. Or if you plan to be more active with investing, look for a low-fee IRA provider with tools and trading platforms to make transactions seamless.
Once you find a provider you like, automate funding from a bank account to ensure regular saving. By taking the time to invest a little money now, you’ll be setting up your future self for a smoother retirement.
Anna Helhoski is a staff writer at NerdWallet, a personal finance website. Email: firstname.lastname@example.org. Twitter: @AnnaHelhoski.
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