Blog — Sisters for Financial Independence

“The best time to plant a tree is twenty years ago. The second best time is now.”

Since most companies are doing their benefits enrollment period in the next few week’s, we though we’d share some of the most common retirement savings options. Even if you are young and have just started your professional career, it’s important to start saving and planning for retirement now so that you can use the power of time to build yourself a hefty next egg when you are older.

Many of us underestimate our needs for the future. When I was in my 20s, I was reluctant to put money into my retirement because it seemed so far away and today, in my mid-30s, it still feels far away, but I’m glad the Obliger in me didn’t listen to my Rebel side (see Gretchen Rubin’s The Four Tendencies for this reference) because having invested my money early on has allowed that money to grow allowing me to few years of financial freedom already.

I am also on the boat that you we all deserve to live in abundance in our old age, not scraping by. We don't stop spending money in retirement and saving early and often will provide you more options down the line to enjoy retirement, make work optional and spend time differently. One of the common misconceptions too is that retirements plans are solely for retirement and while they are a common vehicle for savings in your old age, there are many ways to tap into those savings early on without a penalty (though this is recommended for those that have established their own strategy for using those funds early on and have enough to do so).

Retirement Options Differ Depending On Who You Work For

It’s important to know that retirement saving options differ depending on who you work for. It's important (especially for women) to know what their retirement savings options are as we move through different life stages.⁠ Today, I am currently working part-time and taking care of my 16 month old so my retirement savings options are different. When I was in corporate, I was able to take advantage of employer sponsored plans which provided me a good nest egg that continues to keep growing today.

Do you work for an organization?

Organizations like private/public companies, government, non-profits, schools, etc. all offer different kinds of employer sponsored plans. These are named differently depending on how to they fall in the IRS rule book and how the money is treated.

Here are examples of the common ones: 401(k), 403(b) and 457(b). A brief breakdown is in the graph below and you can read up on the IRS info here.

Common retirement savings options for those that work for an organization be it private, public or government entity

How do you get started with these plans? Your best point of contact is HR. While some companies have HR specialists that focus on retirement, others do not so it may be up to you to do some more research about is being offered. If HR doesn’t have all of the info, keep asking.

Contact HR
Decide how much you'll contribute from each paycheck
Recommendation is to start contributing up to the company match
Verify that your contributions are actually invested
Increase contributions each each year until you are able to max it out

Do you work for yourself?

Working for yourself has its benefits, but it also means you are responsible for selecting your own retirement plans and figuring out the best option for yourself and for your employees if you have any. The critical thing to remember when it comes to retirement plans for the self-employed is that you can take advantage of being both an employer and an employee of yourself which can increase your contribution limit options.

Here are common retirement savings options for the self-employed: IRA, Solo 401(k), and SEP IRA.

How do you get started with these plans?

Discuss with your accountant the best option for you
Open an account through any online or physical brokerage
Decide how much you'll contribute and make it automatic
Verify that your contributions are actually invested
Increase contributions each each year until you are able to max it out

Do you work in your home?

The last area is if your work for your household. This means taking care of children or other adults. In this case, its doubly important that you save as well since a lack of income leads to a few no savings or investments and less Social Security benefits. The good news with this is you can take advantage of an IRA, which is an Individual Retirement Arrangements (Account) to put away some money for your future self. It’s another saving vehicle, but it’s available to a lot more people. It can also be combined with an employer sponsored retirement account so you can maximize your savings that way. You can read more about how moms can pay themselves here. For moms or stay-at-home parents, you can use what’s termed a Spousal IRA to put money into an IRA.

The IRA does have income requirements and limits so you’ll have to check in with the IRS on that here.

Here are some questions that typically arise when we talk about saving for retirement?

Should you pay off debt first or contribute to retirement?

If possible, do both.
Follow the financial order of operations to make sure you are maximizing all of your tax-advantaged accounts.
Contribute up to the company match.
Pay down high-interest debt.
Increase and maximize other tax-advantaged accounts

Should you save for retirement or College costs?

Retirement first because you can't borrow for retirement.
Find ways to reduce college costs - see #collegehacking and more tips here.

For stay-at-home moms (parents)

You can open a Spousal IRA in your name as long as your filing status is "married filing jointly." There needs to be earned income.
Pay yourself using this option.

Lastly a reminder that these accounts are just savings vehicles:

You will need to choose investments to put into these vehicles.

Conventional wisdom recommends low-cost index funds that cover the total stock market for a long-term hold.
Or speak with a financial advisor.
And always automate your contributions so that it doesn’t get forgotten.