Apr 07, 2018
One word: underrated. Retirement is key to your wealth building. Yes, you can be frugal and save as much as possible. Yes, you can aim to be debt free and be intensely paying off your accounts but what are you doing for your future self. Is your future self broke while your current self is comfortable? The good news is you can start saving for retirement at anytime. The bad news is the longer you wait the harder it is going to be on your current self to build a comfortable nest egg.
Let's do the math really quick. Let's say we have a 25 year old that makes $30,000 a year. In order to have $500,000 by retirement at age 65, they would only have to put away 8.5% of their income or $212/month. Now let's take the same example and make it a 45 year old. To have the same amount save by retirement, they would have to save 41% of their income or $1,025/month. See the difference?
Let's start with the types of retirement accounts:
- IRA (Individual Retirement Accounts) - These retirement accounts can be opened by you at any brokerage, bank or credit union. I will also argue that they give you the most flexibility when it comes to choosing what you want to invest in. Typically, if you go through a broker, you are able to invest in anything your heart desires. When I leave a job, I roll the funds to an IRA rather than the new job's 401(k) for this reason. Available in Roth or Traditional (explained later).
- 401(k) - These retirement accounts are set up by your employer. The investment options are limited to whatever your employer chooses to have available BUT if your employer matches, this is a great option! Most employers that offer a 401(k) plan offer a match. If you are not sure, ask your HR department or manager. My current job offers a match of 50% on the first 6% of my income. This means if I make $50,000 a year and I put in 6% every paycheck ($125/bi-monthly) then my employer will also put in $62.50 so the total into my account every paycheck is $187.50! You can't beat free money. If your employer offers a match, at least put in the amount to get the full match. START IMMEDIATELY. Free money is being left on the table, if you don't. Available in Roth or Traditional (explained later).
- 403(b) or Tax Sheltered Annuity (TSA) - These retirement plans are typically offered if you work for the public school system, church, or a non profit organization. Like the 401(k), investment options are chosen by the employer so it doesn't have as much investment flexibility as an IRA. They typically have high administrative costs making this my least favorite option. The employer can offer a match although it is rare. If you are unsure, just ask! If you are not contributing, start! Available in Roth or Traditional (explained later).
There are other types of retirement plans like 457 and SEP plans but IRAs, 401(k)s, and 403(b)s are the most common types. Now you may be wondering what is Traditional and what is Roth? So, I will break that down in my next article because each option has its pros and cons. In the meantime, JUST START SAVING!
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