Saving for retirement is something everybody knows they should do, but hardly anybody does well enough.  Thus, we end up with a lot of poor, old people competing for jobs with their children and grandchildren! Don’t let this happen to you; start your retirement saving as soon as possible!

The best way to save for retirement is with a tax-preferred retirement plan. The most popular such plan is the 401(k), which is offered by most employers and is named after the section of the tax code authorizing it. A 401(k) allows you to have money automatically deducted from each paycheck to be invested; in many cases, your employer may even offer matching funds (otherwise known as free money). These accounts are funded with pretax dollars, meaning you do not pay taxes on the money used to fund them until you withdraw it from the account, at which time you must pay taxes on the withdrawals.

Another to plan is the Roth IRA, or Individual Retirement Account. IRAs can be set up by anyone with earned income, rather than being tied to an employer. A Roth account is funded with after-tax dollars (in other words, the same dollars you spend on anything else) but then grows tax-free; provided that you do not begin taking disbursements until you’re old enough to retire, you never pay taxes on your earnings. Additionally, contributions (but not earnings) can be withdrawn at any time without penalty.

In other case, you’ll generally choose several mutual funds in which to invest your money. How aggressive you want to be depends on how long you have until retirement; someone who won’t be retiring for many decades will want to choose more aggressive funds that will grow faster, while someone who will be retiring in a few years will want conservative funds to reduce the risk of losing money.

William Springer writes on a variety of financial topics for Twenties Retirement, the site for people planning ahead so they can retire young; be sure to check out his site for more great information!

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