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Automatic 401(k) contributions increase retirement savings rates, but you can still automate retirement investing even if you don’t have a 401(k). See how.
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Workplace 401(k) plans can be used to save for retirement. These accounts provide tax advantages, as people who contribute don’t pay taxes on the money they invest in the year they put the funds into their account. Employers also sometimes match contributions.
There’s another good reason why 401(k)s help people end up with enough money in retirement: Many plans auto-enroll workers, which means people are signed up by default and would have to opt out if they didn’t want to contribute.
Studies have shown auto-enrollment actually comes close to doubling the number of people who participate in plans, so it makes a huge difference. That’s because most people tend to stick with the status quo or path of least resistance.
But what if you don’t have a 401(k) at work? Can you still set up automatic retirement savings for, say, an IRA account? Absolutely. Here’s how to do it.
1. Determine how much you want to invest for the future
The first step you’ll need to take if you want to automate your retirement investing is to determine the amount you actually want to save each month. To do that, you’ll need to figure out your retirement goal and then break that big goal down into smaller ones.
A good rule of thumb is that you’ll need 10 times your final salary to retire. So assume you’ll get a 2% raise each year from now through your chosen retirement age, estimate your final salary, and multiply that number by 10. This will give you the amount you need to have invested.
The calculators on Investor.gov can help you determine how much to pull out of your bank account and put into your brokerage account to hit that target.
2. Open a tax-advantaged retirement plan with a brokerage firm
Once you know how much to invest, you’ll need to open a tax-advantaged retirement account at a brokerage firm. Most people can open one of two types:
A traditional IRA: This comes with a tax break in the year you invest in your account. You’ll pay taxes as a retiree on withdrawals.A Roth IRA: This doesn’t provide an upfront tax break but money can be withdrawn tax-free. This is a better option for those who expect to be taxed at a higher rate in retirement.
Almost any brokerage account or financial institution will allow you to open either type of account online. Just check to confirm the broker doesn’t charge any fees and offers tools and investments you want, such as ETF screeners, low-fee ETFs, or no-load mutual funds. Then fill out an application and provide your personal details and bank information to get your account open.
3. Use your brokerage or bank account to set up your automatic contributions
Finally, either your checking account or your brokerage account should offer the option to set up automatic contributions to your brokerage firm. You can usually find this option under the transfer or bill payment section of your bank account or under the deposit section of your brokerage account. Your bank or brokerage firm should also be able to walk you through this process if you can’t figure it out. Call customer service if you need help.
By taking these three steps, you can set yourself on the path to retirement success without much further effort on your part.
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