3 Best Ways to Invest for Retirement

Most people cut it too close with their retirement savings; according to the Transamerica Center for Retirement Studies, the average for a 60-year-old is just $172,000. Such a low amount leaves little room for emergencies and living expenses, let alone something to bring joy into your golden years.

Starting your retirement savings as soon as possible is vital. Here are three great ways to do that.

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Start with the easy money

Your parents or grandparents may have enjoyed a pension for their retirement, but the 401(k) has largely replaced it as the employer-sponsored retirement vehicle most know today.

Employees can contribute a percentage of their annual pay up to $20,500 of gross income, more if you’re over age 50. It comes out of your paycheck before the government withholds payroll taxes, which lowers your taxable income for that year, even though you pay taxes later when you withdraw the money.

However, the best part of a 401(k) plan is the general employer match, where your job matches your contributions up to a percentage of your salary. For example, say you earn a gross salary of $100,000 and contribute 10% annually, or $10,000. If your employer matches up to 5%, it contributes an additional $5,000 to your 401(k) plan. This means your annual savings have increased by 50%; best of all, it’s free money! However, you don’t get it if you don’t participate, so be sure to fund your 401(k) plan, especially if your company matches your contributions.

You have to wait until you’re 59 1/2 to take money out of your 401(k) or you’ll be penalized unless you meet certain conditions, so it’s a long-term retirement savings tool.

Now add some tax savings

A Roth IRA can work in tandem with a 401(k) to replenish your nest egg. This is an Individual Retirement Account (IRA) into which people can deposit take home pay.

Roth IRAs have some great benefits; first, you put taxable money into the account, so you don’t pay taxes when you withdraw it later. In other words, your money grows tax-free.

Second, the account requires you to wait until age 59 1/2 to withdraw your earnings (unless you meet certain conditions), but you can withdraw your installments anytime.

Now the government knows what a good deal a Roth IRA can be, so they limit your annual contributions to just $6,000 a year, or $7,000 if you’re over age 50. Also, income restrictions prevent high earners from using this fantastic and flexible financial tool.

With a dose of flexibility

You can use a standard investment account to fill in the financial gaps of your retirement strategy. Most retirement accounts encourage you to save until your golden years, which is great, but it can limit your financial flexibility when you’re younger.

Suppose you retire early; retirement accounts may have rules about how much you can withdraw, especially if you do so before the traditional retirement age — 59 1/2 for many plans — with fees and penalties if you break those rules.

A regular investment account has no restrictions, making it a great option once your retirement accounts are taken care of.

Remember this key point

There is no exact plan for the perfect retirement; you need to build a strategy around what works best for you. Whatever you do, remember that building your nest egg through multiple account types will give you complete freedom to enjoy your golden years.

Consider the pros and cons of each type of account and you’ll build a financial safety net that can work no matter what life throws at you.

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