Preparing for Retirement

At Heritage, we believe planning for retirement isn’t just about preparing for the distant future, it’s about creating the freedom to live life on your terms, possibly even sooner than you think. Whether you’re dreaming of retiring early or simply want to ensure your golden years are secure, understanding your retirement savings options is a crucial first step.

Two of the most common tools for retirement savings are 401(k)s and IRAs (Individual Retirement Accounts). While they serve a similar purpose, they work a bit differently. From common retirement tools to retirement age, let’s talk about preparing for retirement.

1. Understanding a 401(k)

One of the first words commonly associated with retirement is a 401(k). A 401(k) is a retirement savings plan offered through your employer. 

Traditional 401(k) contributions are deducted from your paycheck before taxes, reducing your taxable income now. You choose your contributions by selecting a percentage of your income to contribute to a 401(k). The automatic payroll deductions make savings simple and consistent. 

Many employers offer matching contributions, often up to a certain percentage of your salary. For you, this is essentially free money and one of the best returns on investing you can receive. It’s important to know what your employer’s 401(k) offering is as a benefit and recommend to contribute at least the amount your employer will match. 

With a 401(k), your investment options are traditionally chosen by the plan provider and may be limited when compared to other investment options. 

Each year, the Internal Revenue Service (IRS) sets the maximum annual contribution limit for a 401(k). Learn more about the 401(k) contribution limit here.

2. Understanding IRAs

While some employers offer an Individual Retirement Account (IRA) option, an IRA is a retirement account you can open and manage independently from your job. It may offer you more control, flexibility and potential tax benefits. There are two main types of IRAs, traditional and roth. 

With a Traditional IRA, contributions may be tax-deductible meaning taxes are paid upon withdrawal. With a Roth IRA, contributions are made with after-tax dollars, but qualified withdrawals are entirely tax-free. A Roth IRA is often considered an appealing option for young professionals who are likely to be in a higher tax bracket when they retire than when they contribute. 

The IRS sets the maximum annual contribution to IRAs as well. Learn more about the limits set by the IRS here.

3. Starting Early

Whether you plan to contribute to a 401(K), IRA or both, time is one the most valuable tools in wealth building. The earlier you begin saving and investing, the more opportunity your money has to grow through the power of compound interest. 

Compound interest is the process by which the interest you earn on your savings or investments also earns interest over time. In other words, it’s interest on your interest, and it can significantly accelerate the growth of your money. 

For example, according to the U.S. Securities and Exchange Commission’s compound interest calculator, if you begin with an initial investment of $200 and continue investing $200 per month starting at age 22 with a 7% average annual return, you could yield approximately $598,000 by age 65. Delaying by just 10 years, starting at age 32, with the same contributions and average annual return could result in a balance of approximately $287,000. That’s less than half, despite contributing the same monthly amount.

Each year, the amount you earn increases with compound interest not because the interest rate changes, but because your balance is growing, and you're earning interest on a larger amount. Even modest contributions made early can lead to significant long-term gains.

4. Budgeting with Purpose

Financial success isn’t determined solely by how much you earn, but by how much you retain and invest. It is important to budget contributions to retirement. Effective budgeting is not about restriction, it’s about intention. By allocating your income with purpose, you gain control over your finances and create space for meaningful goals, such as wealth accumulation and long-term financial security.

As you begin to earn more or accept promotions throughout your career, it is recommended to avoid "lifestyle inflation,” or the tendency to increase spending as income grows. Instead, maintain a modest lifestyle within reason to maximize savings and investment potential.

Some simple strategies to avoid lifestyle inflation include extending the life of your current vehicle, sharing housing costs where practical, avoiding high-interest debt and purchasing pre-owned goods when feasible.

The objective isn’t to eliminate enjoyment, but to make deliberate choices. Whether your goal is early retirement, travel or financial independence, consistent budgeting lays the foundation. Learn more about the benefits of saving for retirement here.

5. Thinking About Retirement Age

It is common to envision retirement as a point in time, but it’s truly a point of financial readiness. Once your investments generate enough income to support your lifestyle, you’ve reached financial independence. 

Whether that milestone comes at 65 or 35, depends on the actions you take today. It is common to use the 25x Rule and the 4% Rule to measure this number. The 25x Rule says multiply your annual expense by 25 to estimate the amount of money needed to retire where you can safely withdraw about 4% of your investments each year for thirty plus years. For example, using these rules, if you spend $40,000 a year, you’ll need about $1 million. If you spend $60,000 a year, you’ll need around $1.5 million.

Many are looking for early retirement or retiring voluntarily before the age of 65. Because of this, the FIRE — Financial Independence, Retire Early — movement has grown in popularity. FIRE is based upon the principle that it’s not about being ultra-wealthy, it’s about being ultra-intentional. FIRE followers save 50 - 70% of their income, invest aggressively, live well below their means and attempt to reach financial independence in their 30s or 40s. 

While FIRE might not be for everyone, the principles of discipline preparing for retirement apply to all who are preparing for retirement.

6. Diversifying Investments

Remember that in addition to a 401(k) or IRA, there are other ways to invest and build wealth that can assist in preparing for retirement. For example, you could deposit money into a certificate. Certificates are a type of savings tool where you agree to deposit funds for a fixed period, earning a fixed dividend rate. View the current certificate rates offered by Heritage here.

You can purchase stock and invest in the stock market. When investing in the stock market, it is important to consider your risk tolerance, length of investment and company(s) of choice. It is recommended to do research and seek professional advice when investing in the stock market. 

Another option is real estate. While real estate may require a larger up-front cash investment, real estate can be a good investment option if it offers you large returns and a consistent passive income. Real estate is also a physical commodity that has the value of itself. Some real estate investment options include buying property directly, real estate limited partnerships or real estatement investment trusts (REITs). Learn more about these options here.

It may seem overwhelming to prepare for retirement, but the principles are simple. Start saving in either a 401(k), IRA or both as early as possible, live a budgeted life for the lifestyle you desire and think about additional options for building wealth.

The views and opinions expressed in this blog are those of the writers, and do not necessarily reflect the views or positions of Heritage Federal Credit Union.

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