Let’s look at the ripple effect that just a little savings in a qualified retirement account, such as an IRA or 401(k), can have on four distinct aspects of your personal finances. There is power in saving for the long term in a retirement account. Let’s see how this simple actions improves your finances.
Even though savings may seem like an obvious effect of putting $1 in a retirement account, the amount we save is one of the most important factors in determining retirement success. This may be the simplest step but I would also contend it is the most important. Without the simple act of saving you can’t reap the other advantages of a retirement account. I recommend making savings automatic. Set up a transfer so that you never see the funds in your checking account and therefore, aren’t as tempted to spend those monies.
Investing will give your money the opportunity to grow over time. It’s important to select investments that are appropriate for when you need to spend those funds. It is also, important to understand the market will likely drop (maybe even several times) during the life of the account. Also, remember that fees eat into investment returns so select funds with low expense ratios (there are many other criteria, but we can’t to go into them here) if they are offered to you.
Depending on the retirement account type you have you could receive tax benefits either now or in the future. See this post for more information about the varying tax treatment of different accounts Traditional vs. Roth Accounts. In any case, in retirement accounts you aren’t taxed on the growth in your account. The fact that gains aren’t taxed allows you to maximize the growth in the account.
Every qualified retirement account has a beneficiary. This is a person or organization, that you specify, who would receive the funds if something were to happen to you. You can name more than one person, all your nieces and nephews for example or several charities that support your favorite causes. Getting your beneficiaries right is critical because a designated beneficiary trumps all other estate planning documents.
Contributions to a retirement account has a meaningful impact on many areas of your finances, including your ability to SaveUp!
This post was written by SaveUp’s personal finance contributing writer, Catherine Hawley, CFP®.