How to Start a Retirement Fund

Starting a retirement fund can give you security and financial strength, especially in the long term. You can choose from several types of tax-advantaged retirement, from a 401(k) to an IRA. Consistency is essential for retirement savings, and even small contributions can add up over the months and decades. Read on to learn how to start a retirement fund and prepare for comfortable golden years, and how MoneyLion can help with a managed investing option.

​​Ways to start setting aside funds for retirement

If you want to set aside funds for retirement, you have a few options, including high-yield savings accounts to various investment options. When you’re saving for retirement, the government offers tax-advantaged accounts to help you save more. Here is an overview of the types of funds you can use. 

401(k) plans

A 401(k) plan is an employer-sponsored retirement plan. According to the IRS, a 401(k) is a qualified profit-sharing plan. You can contribute a portion of your income to a 401(k) and deduct it from your taxable income for the year, leading to tax savings. In addition, employers can contribute to employees’ accounts. For 2024, you can contribute up to $23,000, including employer and employee contributions.

After contributing to a 401(k), you’ll have the opportunity to invest the funds in a diversified portfolio according to the investment options available from your 401(k) plan administrator. Learn more about 401(k) early withdrawal penalties. 

403(b) plans

If you work for a public school or non-profit organization, you may have access to a 403(b) plan. 

A 403(b) plan is a tax-sheltered annuity plan that is similar to a 401(k) but is a retirement plan offered by public schools, Code Section 501(c)(3) tax-exempt organizations or churches.

Similar to a 401(k) plan, you can make contributions to your 403(b) plan and defer some of your salary with a tax-advantaged account. Like a 401(k), after putting money into the account, you’ll choose from the plan’s investment options to try to maximize growth. 

Traditional IRA

A traditional individual retirement account or IRA is a tax-advantaged retirement account that functions similarly to a 401(k). You can deduct all contributions from your taxable income for the year, potentially reducing your total income taxes. 

IRAs have smaller contribution limits than 401(k)s. For 2024, the maximum combined contribution you can make to all traditional and Roth IRAs is $7,000 or $8,000 if you’re 50 or older. 

The funds you deposit in an IRA can be invested and also grow tax-deferred. Amounts in your traditional IRA, including earnings and gains, are not taxed until you take a withdrawal or distribution from the IRA.

Unlike with a Roth IRA, there are no income limitations to opening a traditional IRA unless you also contribute to a work 401(k). IRAs generally have more investment options than 401(k) plans. Two final considerations relate to withdrawal rules for an IRA. The U.S. government charges a 10% penalty on early withdrawals from a traditional IRA, and a state tax penalty may also apply. In addition, as of changes in the law in 2023, you must start taking withdrawals when you reach age 73.

Roth IRA

A Roth individual retirement account, usually called a Roth IRA, functions differently from a traditional IRA or 401(k). Unlike a traditional IRA, you won’t deduct Roth IRA contributions from your taxable income in the year of the contribution. 

Instead, you’ll pay income tax on the full amount. However, then the funds can grow tax-free. You won’t be required to pay income tax on funds you contributed or earned when you withdraw them as long as the account is at least 5 years old and you’re 59½ or older.

According to the IRS:

• Can contribute to your Roth IRA after you reach age 70 ½ as long as you’re earning income

• Funds stay in your Roth IRA as long as you live

• Must designate account as a Roth IRA during setup

• Different rules for Roth IRA contribution growth 

For 2024, the maximum combined contribution you can make to all traditional and Roth IRAs is $7,000 or $8,000 if you’re 50 or older. 

Unlike a traditional IRA, a Roth IRA doesn’t require minimum distributions. You can pass on a Roth IRA to your heirs. However, Roth IRAs have income maximums. To contribute to a Roth IRA as a single tax filer you must have a modified adjusted gross income (MAGI) of less than $161,000. If you’re married and filing jointly, your joint MAGI cannot be over $240,000.

SIMPLE IRA

A Savings Incentive Match Plan for Employees or SIMPLE IRA allows employees and employers to contribute to traditional IRAs set up for employees. It is a solution for small employers not currently sponsoring a retirement plan such as a 401(k). 

With a SIMPLE IRA, employees can make salary-reduction contributions, and the employer is required to make matching or nonelective contributions. The employee always has 100% ownership in the SIMPLE IRA. An employee cannot contribute more than $16,000 from their salary to a SIMPLE IRA in 2024

According to the IRS, you can take distributions from your IRA, including a SEP-IRA or SIMPLE-IRA, at any time. You don’t need to show financial hardship to take a distribution. You must include a distribution in your taxable income and pay a 10% penalty if you’re under the age of 59 ½.

SEP IRA

A Simplified Employee Pension IRA or SEP IRA is a traditional IRA for self-employed individuals and business owners. Like a traditional IRA, SEP IRA contributions are tax-deductible. Investments grow tax-deferred until retirement when distributions are taxed as income. If you’re a small business owner or self-employed, you can contribute to a SEP IRA.

As a business owner, you can set up a SEP IRA for your employees and yourself. You can contribute whichever is less: 25% of the employee’s total compensation or a maximum of $69,000 for the 2024 tax year. If you’re self-employed or a business owner, your contributions to your own SEP IRA are generally limited to 20% of your net income.

Investments

In addition to tax-advantaged accounts, if you want to help build additional wealth, you can open a brokerage account for investments. Whether you deposit retirement funds into a 401(k), any type of IRA, or a brokerage account, experts suggest that you invest the funds using a risk-balanced investment strategy according to when you plan to retire. 

A simple place to start for investment is an index fund that tracks the S&P 500, an index of about 500 of America’s top companies. As of the end of February 2024, the average yearly return of the S&P 500 has been 11.3% over the last 50 years. These types of funds are highly diversified, which helps reduce your risk, and tend to have low fees. However, past performance is no guarantee of future success.

Other investments for retirement can include:

• Stocks

• Bonds

• Real estate investment trusts (REITs)

• Exchange-traded funds (ETFs)

• Mutual funds

• Alternative asset classes like precious metals and oil

• Cash in a high-yield savings account

Tips when starting a retirement fund

When starting a retirement fund, basic principles apply, including investing consistently and diversifying your portfolio according to risk. 

Assess your current lifestyle

Your current lifestyle helps give you insight into your future retirement needs. Looking at your lifestyle and retirement goals can be an important first step in retirement planning. According to the 70-80% spending rule, you’ll need 70% to 80% of your current monthly expenditures to maintain a similar lifestyle in retirement. 

Your actual financial needs can vary widely based on what you plan to do in retirement and other factors, such as whether you’ve paid off a mortgage on your home or face increasing costs for rent. Your financial needs could be as little as 54% or as high as 87%. If you plan to buy a vacation home, take round-the-world trips, or otherwise change your lifestyle, your costs for living could be higher. 

Start saving early and start small

In the case of retirement savings, time is one of your greatest assets. Small regular contributions over decades can add up. For example, if you were to start investing a couple hundred dollars a month at age 18, it could add up significantly by the time you reach retirement. 

For example, $500 a month invested for 40 years with an average annual return of 7% will be over $1.2 million. If after 20 years you increase the savings to $2,000 a month, that figure could become nearly $2 million. 

Automate your savings

Many financial experts suggest paying yourself first. One way to do this is to automate your savings. For example, you could set up an automatic transfer of $500 or $1,000 a month into a 401(k), IRA, or brokerage account to take advantage of regular contributions. 

Take advantage of employer-matching contributions

If you aren’t maximizing employer-matching contributions, you’re leaving money on the table. For example, if your employer offers a 100% match on up to 6% of your salary, if you’re not contributing 6% of your salary to a 401(k) or other employer-sponsored retirement program, you’re leaving that income in your employer’s pocket.

If you make $100,000 a year, that’s $6,000 in retirement savings you’re leaving behind. If you don’t know how much your employer will match, speak to your company’s HR department or plan administrator and make sure you’re hitting those contributions. 

Pay off your debt 

High interest debt can cost a lot in the long term. Even lower interest debt like a mortgage can be a financial strain after you retire. Prepare for retirement by working to pay off all debt as quickly as possible. Prioritize credit cards and other high-interest debt first. Then, you can consider making biweekly mortgage payments or a principal-only payment to pay off your mortgage faster and save on interest payments. 

Determine your risk tolerance level

Risk tolerance, as the name implies, is how much you don’t mind taking risks in your long-term investments. Generally, higher-risk investments also have the potential for higher returns and bigger losses. When building a retirement fund, it’s essential to look at your personality, overall risk tolerance, and investment timeline for retirement to choose an appropriate portfolio. 

You can speak with a financial advisor or research common asset allocations from Charles Schwab, Vanguard or other major investment banks to determine your individual needs. 

Diversify your investments

Diversification is the cornerstone of any investment strategy. The old saying, “don’t put all your eggs in one basket” holds true for investments. Consider various asset classes and diversify across risk and asset classes to maintain a balanced portfolio. 

Final Tips on Retirement Savings

Should you save for retirement? Yes! Even small monthly contributions over years can add up to a significant financial cushion. Building your retirement portfolio can help prepare for your golden years or offer opportunities for early retirement. Find more tips to start saving for retirement and learn to maximize your savings this year. You can learn more about calculating your liquidity needs to create a personalized investment portfolio for your retirement goals. 

FAQ 

Can I open my own retirement fund?

Yes, you can open your retirement fund. Consider opening a traditional IRA, Roth IRA, or SEP IRA to start saving for retirement. 

How much do you need to start a retirement fund?

You can open a retirement fund without any money. Once the account is open, make a plan to transfer funds into the account each week or each month to start building retirement savings. 

What is the $1,000-a-month rule for retirement?

The $1,000-a-month rule, suggested by the Certified Financial Provider Wes Moss, says it could be wise to have $240,000 saved for every $1,000 of disposable income in retirement. If you want to have $4,000 per month of disposable retirement income, you’ll need to save at least $960,000. 

Can I open a 401(k) without an employer?

You can open a solo 401(k) without an employer. To qualify, you must be self-employed or own a small business with no employees other than your spouse. Your freelance or small business work doesn’t need to be full-time to qualify.

What is the 50-30-20 rule?

The 50-30-20 rule suggests you allocate 50% of your take-home pay to basic living expenses, 30% to wants or extras such as clothing and entertainment, and 20% towards savings.