6 in 10 Americans aren’t saving for retirement—here’s where to get started
by Ryan Ermey | Originally posted on CNBC
Most Americans are saving at least some of their money. About 89% of adults put cash away on a regular basis, according to a recent survey conducted by The Harris Poll on behalf of NerdWallet.
But not a lot of that money is making it into accounts designed for long-term goals. In fact, 6 in 10 Americans don’t have a retirement-specific account, per the survey. That number is even higher for millennial (66%) and Gen Z (73%) savers.
If you’re among the cohort lacking a retirement account, just about every financial planner would tell you to get started as soon as possible. The sooner your start saving for retirement, the more time compounding interest has to work its magic on your portfolio.
But where to start? There are plenty of different ways to invest out there, including workplace retirement accounts, individual retirement accounts, accounts designed for medical expenses and regular old brokerage accounts.
If you have money you’re aiming to put away for retirement, the “order of operations” in terms of where you invest depends on your specific goals and needs. Still, there are some general guidelines that financial pros typically prescribe when it comes to where you park your retirement savings.
Read on to find out where they say to put your money first.
Priority 1: Emergency savings
OK, it’s not actually a retirement account. But you need to make sure you have your bases covered before you start investing, financial pros say. That’s because you don’t want to be dipping into your retirement funds (which triggers a penalty in some cases) or going into debt when an unexpected expense crops up.
Most financial planners suggest saving three to six months’ worth of expenses in a high-yield savings account, but you don’t necessarily need to have all of that before you start investing. (For more on the best high-yield savings accounts, check out this list from CNBC Select.)
“First, you need to make sure you have $1,000 in the bank in case of emergency,” says Christopher Lyman, a certified financial planner with Allied Financial Advisors in Newtown, Pennsylvania. Then you can start investing while simultaneously building your emergency savings.
Priority 2: Get your ‘free money’ with a workplace account
If your employer matches up to a certain percentage that you contribute to a workplace retirement account, such as a 401(k), investing enough to get that contribution should be your top priority, financial pros say. “It truly is free money,” says Kevin Brady, a CFP and vice president at Wealthspire Advisors in New York City.
Whether you select a traditional 401(k) or Roth version (offered by about 9 in 10 employers), you’re getting a tax break on your retirement savings. Contributions to traditional accounts lower your taxable income in the year you make them. In exchange for this upfront tax break, you’ll owe income tax when you withdraw the money in retirement.
Roth accounts work the opposite way. You fund these accounts with money you’ve paid taxes on. But once you’re 59½ and have held the account for at least five years, you can withdraw your contributions and earnings tax-free.
Which type of account is right for you depends on your tax situation as well as personal preference. Generally, Roth contributions are thought to benefit early-career workers. If you earn a lower salary, the thinking goes, it’s worth it to pay the tax upfront while you’re in a lower tax bracket and withdraw tax-free in retirement when you’re (hopefully) bringing in more.
Priority 3: Get triple tax savings with an HSA
Not every retirement saver can invest using a health savings account. These savings vehicles are only available to those enrolled in high-deductible health plans, a type of insurance with a deductible (the amount you must pay out of pocket before the insurer begins covering costs) of at least $1,500 for self-only coverage and $3,000 for family coverage.