Saving vs. Saving for Retirement
Saving money is something that sounds simple at first: You set money aside instead of spending it. When you actually dig into the practice of saving, though, you realize there's a bit more to it than that. For instance, the best saving strategies really depend on what you’re saving for. In particular, saving for retirement is quite different from, say, saving for a vacation.
So, how does saving for retirement differ from other types of saving? Take a look.
Saving For Retirement Is Very Long-Term
Most savings goals are relatively short-term. You may spend a year saving for your vacation or three years saving for a kitchen update. On the other hand, you'll save for retirement over the course of your entire career.
Because of this long saving term, you should be prepared to change your strategy as your life changes. For example, you may start by saving $100 a month toward retirement as a 22-year-old, but as your income increases, you'll need to increase that amount. There may also be times when you lose your job and can't save for retirement for a while. You'll need to make up for that later on.
Because your plans and goals will change, it's really important that your retirement savings strategies are flexible. You'll need to periodically re-evaluate your earnings, lifestyle, and goals to establish new savings plans.
Saving For Retirement Really Requires Investing
Most people use savings accounts to store the money they're saving toward shorter-term goals. But you'd be silly to park your retirement savings in a savings account. Instead, you'll need to invest your retirement savings and let the money work for you. Many people choose to invest in a combination of stocks and bonds, but there are also good investment opportunities in real estate and business. As you start planning for retirement, meeting with an investment advisor is wise.
Saving For Retirement Should Be Done in a Tax-Advantaged Way
Sadly, the government is not going to give you a tax break on the money you save toward your Caribbean getaway. However, they do give you tax breaks on the money you save toward retirement, provided you know how to take advantage of them. You'll want to put your retirement savings into a tax-advantaged account, such as a 401k or Roth IRA. A financial advisor can help you weigh the pros and cons of various tax-advantaged accounts and choose the right option for your needs.
Saving For Retirement Must Be a Top Priority
Savings goals vary in their importance. For example, your goal of saving toward the purchase of a home is quite important. However, your goal of saving for a new backyard pool is not as important. Saving for retirement, though, has to be a top priority. If you do not set aside that money now, you will have to keep working for longer than may be desirable.
Because saving and planning for retirement has to be a priority, most people treat retirement savings as a required monthly expense, like their mortgage or health insurance payment. Other savings goals can come further down the list. For instance, you may only contribute to your "new pool savings account" in months you have a little extra income.
Saving money is simple, but saving for retirement is a bit more complex. You really need to make retirement savings a priority and make sure you're investing in tax-advantaged accounts. Because retirement saving is such a long-term goal, your goals and strategies are going to change throughout your life. But that's okay! The most important thing is that you do keep saving and planning for retirement.