A starter guide to retirement: 5 steps toward a secure future

It's not easy to prepare for one's financial needs 40 years into the future, and yet a retirement plan is supposed to help workers do just that. But how can employees get into this mindset, especially as they're first starting out? 

Some experts estimate that workers will need approximately $1 million to retire comfortably, with the average couple needing $315,000 for healthcare expenses alone. And while everyone's necessary nest egg will vary depending on what standard of living they wish to maintain, saving enough money to live on after 65 is a daunting task for just about every American — especially as social security funds dwindle and the cost of living continues to skyrocket.

Still, with enough foresight, guidance and discipline, retirement is possible, underlines Anthony Bunnell, head of retirement for Morgan Stanley at Work, a workplace financial solutions company. It starts with putting money away in the right account and letting it grow. 

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"It was Einstein that said the eighth wonder of the world is the power of compound interest," he says. "A lot of people just sock money away in a savings account and don't see the impact taxes have on dragging down that balance each year. So take advantage of tax-deferred accounts whenever possible."

A tax-deferred account, such as 401(k), is an investment account that allows Americans to postpone paying income taxes on the money there until it's withdrawn. This means savings can grow each year with the help of compound interest, given that the employee is investing the same amount each year. 

"If you have $100 and it grows to $110 in a taxable account, you would get taxed on the growth of that money," says Bunnell. "In a tax-deferred account, that $10 would be compounded and $110 would grow next year."

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Using this concept, if that $110 earns 6% interest, it will grow to $127 the next year, despite the individual's contribution of just $10. In the long-term, contributing less than 10% of an annual income of $50,000 to a retirement account each year can equate to saving over $200,000 in 20 years, as a typical 401(k) generates an average annual return of 5% to 8% interest, depending on the market. 

But to make this math work, there's some basic education employees need to learn. Bunnell and Edward Gottfried, director of product for finance management platform Betterment at Work, break down the first steps to retirement, demystifying different savings accounts workers can use to their advantage, regardless of their employer. 

Start with your employer

For Gottfried, the first question workers should ask themselves is if their employer provides a retirement plan. Typically that would be in the form of a 401(k), or if the employer is a non-profit or educational institution, they are required to offer a 403(b), which is similar to its better-known sibling, explains Gottfried. 

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From there, employees should find out if their company provides an employer match, meaning the company will match a certain percentage of what the employee contributes to their retirement account. An employer may even match their employee dollar for dollar, up to a certain percentage of their salary. For instance, if an employee puts 4% of the salary into their 401(k), the employer will match it, doubling the amount now in the account. But if an employer's maximum match is 4%, an employee may put 6% of their salary into savings and the employer will still only contribute 4%. 

"Employer match is free money," says Gottfried. "It's really there for you, and you should do everything you can to get that match."

Bunnell echoes this, encouraging workers to first consider taking advantage of their employer-sponsored plan and match before jumping to other retirement accounts, like an IRA. However, Bunnell admits that if the employee seeks more flexibility in how they invest their savings, an IRA may be a better fit. 

Going beyond the employer

If an employee decides they are not getting enough bang for their buck with an employer-sponsored plan, they can get an IRA, which is mainly divided into types of plans: traditional and Roth. 

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A traditional IRA allows the user to grow their savings without paying taxes on the amount they save each year, like a traditional tax-deferred account. Once an individual withdraws this money during retirement, then they will pay taxes on the amount they withdraw. On the other hand, with a Roth IRA, the user pays taxes on the money they put into the account as they save, but they don't have to pay taxes on the money once they withdraw it during retirement. 

This decision comes down to whether the individual believes they're paying higher taxes now than they will in retirement. For those who think they will be in a higher tax bracket by the end of their careers and have long ways to go until they retire, Roth may make more sense, notes Gottfried. 

"Consider if you will get taxed at a higher rate today than you might in the future," he says. "Even consider whether you'll be living in a place where taxes are higher than where you might be retiring."

Additionally, with a traditional IRA, users will be penalized for withdrawing money before they are 59 and a half years old, and once they turn 72, they are required to take out a certain amount of money each year and pay taxes on it. With Roth, users can withdraw at any time without penalty.

Another way to save

Health savings accounts, or HSAs, can serve as another retirement savings account, in combination with a 401(k) or IRA, explains Bunnell. Workers are eligible for HSAs if they are enrolled in a high-deductible healthcare plan. Unlike flexible savings accounts, employees can roll over whatever is in their HSA each year, with an annual contribution limit of $3,650. But a high deductible health plan comes with its own downsides — an employee may not be able to afford their high deductible each year to access care without constantly dipping into their HSA.

"If they can pay for their medical expenses out-of-pocket, and they're okay with leaving the money inside the HSA, then they should absolutely use it as an additional retirement vehicle," says Bunnell. "HSAs can offer a tremendous savings opportunity because they are triple tax-deferred."

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HSA account holders can not only contribute and grow their savings tax-free, but withdrawals for qualified medical expenses are tax-free, too. And since contributions made to an HSA are tax-deductible, a user can reduce their taxable income by the amount they contribute, and hence lower their tax bill — similar to a 401(k) and traditional IRA. 

Communication is key

Employers are partly responsible for the utilization and success of their employees' retirement accounts, underlines Gottfried. He encourages employers to offer incentives like gift cards for employees who open a retirement account and continually remind employees of the company's retirement benefits. In a virtual work world, Gottfried recommends that CEOs themselves are the ones sending the emails. 

"When employees hear directly from their managers or CEO about how great their benefits are, they are much quicker to take advantage of them," says Gottfried. "Small nudges go a long way."

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Bunnell lets employers know that it's okay to ask for help, so employers and employees can get the most out of their plans.

"Partner with an advisor that understands workplace benefits," he says. "They can create an education plan and show employees the benefits of participating." 

The sooner you start, the better

Gottfried and Bunnell agree that establishing sound retirement saving habits early in one's career can be life-changing. A good rule of thumb is to put aside 10-20% of every paycheck for one's future self. This includes contributions to any high-interest debt payments like student loans, an emergency fund that is preferably in an FDIC-insured savings account and a retirement account, explains Gottfried. As cliche as it sounds, every dollar counts — and adds up. 

"Think about it as paying yourself first," says Gottfried. "It's something you will be grateful for decades down the road."