As a new grad nurse, you’ve got a ton on your “must-do” list:
Pass the NCLEX, land a job that you will enjoy, purchase scrubs, get your first paycheck, get through the new grad growing pains, learn that you will be continuing your education your entire career,…the list goes on and on.
There’s another, critical, financial to-do that you need to accomplish.
Start investing for retirement.
Why should you prioritize retirement investing now?
That’s a fair question…retirement can seem like a lifetime away, making it feel far less urgent than life’s other priorities. However, time is your best friend when it comes to retirement investing. Most people’s biggest regret is not saving earlier. On the other hand, no one has ever said they regret saving too much for retirement, too early.
The earlier you start investing the less you have to contribute. Insert the power of compound interest, this concept means that the earlier you invest, the sooner your investments start growing and making money for you. You cannot, ever get back time in that equation.
Starting to invest today with smaller amounts will begin your financial snowball in your investment accounts.
Finally, nurses should care about investing for retirement because have you ever heard of a thing called burnout? It can happen at any time. Imagine you burn out in 10 or 15 years, if you were you have started your retirement savings at the beginning of your nursing career you could be on the verge of retirement by then, we will talk more about early retirement in later blog posts. (If you don’t want to wait shoot me a message and we can discuss it one-on-one).
This is when you should be asking yourself, well what do I invest in? What type of account is best – an IRA or a 401(k)?
Let me be clear, either an IRA or a 401(k) is better than doing nothing.
Once you’ve decided to invest, it’s time to identify the best type of account for your retirement investing. Stick to the end to find out where I would put my money first.
All I can say is do not spend months trying to make the perfect choice. This could lose you valuable time which in turn loses you thousands of dollars.
Here’s a summary of the main differences between an IRA and 401(k):
401(k) Accounts
Offered by your employer, this account allows you to invest a percentage of your wages for retirement. 401(k) is just the subsection of the IRS Code that defines how these accounts work. Generally, you cannot access the funds in a 401(k) account without paying steep penalties until you reach retirement (there are loopholes for early retirement through).
So how much can you contribute? As of 2022, you can save up to $20,000 annually in a 401(k). If you are 50 years old or older you can contribute up to $6,500 more.
Many employers contribute a match, this is typically a percentage that is added to your retirement savings by your employer. This is free money; never pass up free money!
There are two types of 401(k)s offered, traditional and Roth, below are short descriptions of each.
Traditional 401(k)
- 401(k) accounts are funded with pre-tax wages. This means you pay less in taxes to the IRS. It also means you’re investing a larger amount of money (since you’re investing a full dollar earned, not just the portion remaining after taxes are paid).
- You pay taxes on the money when you withdraw it in retirement.
Roth 401(k)
- Roth 401(k) accounts are funded with after tax wages. This means you pay taxes today and then contribute to your retirement savings (keep reading to learn about the benefits).
- You do not pay taxes when you withdraw this money in retirement. So you do not owe the government any taxes from these accounts in retirement.
Individual Retirement Account (IRA)
IRAs are retirement investment accounts that can be opened by an individual, self-employed individuals and small business owners. You have to open this account for yourself at a qualified broker, like Vanguard or Fidelity.
So how much can you contribute? In 2019, you can save up to $6000 annually in an IRA. If you are 50 years old or older you can contribute $1,000 more.
Funds in an IRA account are for your retirement, but there are ways to pull this money out early for retirement or other qualifying expenses. These include higher education expenses, a first-time home purchase, and medical costs.
There are two types of IRAs offered, traditional and Roth, below are short descriptions of each.
Traditional IRA
- Traditional IRAs are funded with wages that you have already paid taxes on. However, depending on your income, you may be able to deduct this contribution from your taxes.
- You pay taxes on the money when you withdraw it in retirement.
Roth IRA
- Roth IRAs accounts are funded with after tax wages. This means you pay taxes today and then contribute to your retirement savings (keep reading to learn about the benefits).
- You do not pay taxes when you withdraw this money in retirement. So you do not owe the government any taxes from these accounts in retirement.
Where Do You Put Your Money?
Like many financial answers, it depends. In general, with a 401(k) there is generally less options on where to put your money than an IRA. But if there is an employer match this is where I would start. Do not turn down this free money even if all you do is put in the percentage amount this is free money added to your retirement accounts, you can’t go wrong there. You would want to contribute up to the match!
IRAs allow you more freedom to invest in nearly whatever you want. So, if your employer doesn’t offer a match, this is where you will want to start investing your money. You can choose where you want to put your money up to the max contribution.
Then if you have more room to save, go back to your 401(k) and continue to save until you max it out.
That being said, the best advice I can give you is to make an informed decision quickly, and start investing (or, increasing your investing). Every day that passes without your money in the market is another day that you’re missing out on the amazing power of compound interest.
Amanda