Take advantage of contributions to get up to speed if you're 50 or older. The best way to save for retirement is in a retirement savings account. The best thing you can do is buy something called an index fund and keep it forever. Index funds buy all stocks or bonds in a particular category or market.
The advantage is that you know that you will get all the available returns on, for example, large US stocks or bonds in emerging markets. Another popular option for saving for retirement is the 401 (k) plan, which is set up through your employer. A 401 (k) may offer benefits similar to those of an IRA, but it also has some important differences. The 401 (k) plan allows you to automatically invest directly from your paycheck, so many people don't realize that money is being diverted to their retirement account.
The biggest benefit of a 401 (k) plan could be the employer's counterpart. Many companies match part or all of their 401 (k) contribution, giving you free money in exchange for saving for retirement. Ideally, you should start doing this with your first paycheck. If 15% seems like a big number, start small and gradually increase the percentage over time.
The more time you have to save, the more time you have the money to accumulate and earn compound interest. Think of a 401 (k) plan counterpart as free money. Just keep in mind that you won't actually be able to keep those contributions until you fully participate in your employer's plan. Do you know all the fees associated with your 401 (k) account? An increase in fees from just 1% to 1.5% could amount to thousands of dollars over the course of a couple of years, so do an audit to make sure you're not paying too much in fees.
Ignore the stories about a 20% return, it's completely unrealistic to expect that from your retirement savings. Understand that saving for retirement is a long-term thing; the more time you invest your money, the more likely you are to get an average return. Of course, higher-risk investments, such as individual stocks, have the potential to generate more income than low-risk investments, such as CDs, but you could lose money. Bonds, CDs and money market funds are more conservative, but they provide a form of stability that is beneficial in the long term.
The trick is to find a balance that you're comfortable with and that helps you reach your savings goals. There is no standard formula for deciding how much money to invest in high-risk, high-reward investments. Overall, however, most people reduce their risk as they approach retirement, when they have fewer years to recover from heavy losses. Still, people live longer today, so just because you're 60 doesn't mean you have to sell your shares.
There are many different types of investment accounts, but retirement accounts, such as IRAs and 401 (k), were created specifically to provide incentives for people to save for retirement. A traditional IRA is a tax-advantaged plan that allows you to get significant tax benefits while saving for retirement. While many people save for retirement in employer-sponsored plans, such as 401 (k), s and 403 (b), s, they're not always an option.