In theory, everyone knows that you need to save for retirement. Yet, many people don’t know where they should put their money or how much they need to contribute. A lot has changed in the last few decades when it comes to what retirement means.
Cultural norms around retirement have changed in the last century. We went from being able to rely on your employer to provide a pension to having to depend on yourself to invest for your future. Many young people don’t want to wait until they are 59 and 1/2 to be able to retire, nothing about that sounds ideal. People want to be young and healthy, do work they love, travel the world, have all the time and freedom to do with what they please. And there is nothing wrong with this dream.
Although, many young people have to take into account the routes they take when starting their careers. This includes taking out student loans, choosing a career they will make money in and how hard finding a job in that field will be. College doesn’t have to be the route you take. Many people succeed without college, but you have to have a plan either way.
If you go through college or a trade and take out student loans you must have a reasonable repayment plan. Expecting student loans to stick with you for years is not a positive financial plan.
When planning your career track you need to consider your return on investment (ROI). If you choose to take out hundreds of thousands of dollars of student loans you need to make sure that you will be making enough money to pay it off. Don’t rely on the government to forgive your loans. That’s a scary thought when every 4-8 years someone changes the plan.
Lastly, make sure there is demand in your career choice. Don’t spend 2-8 years of your life getting certifications or a degree in something that you will not even be able to practice.
Now that we’ve cleared up some background let move on the meat and potatoes of this topic. Where should you start with your retirement savings?
Most of us weren’t taught about 401k’s or Individual Retirement Accounts (IRAs) in high school or even college. So know you aren’t alone if you aren’t quite sure what to do with all of the acronyms that come with retirement lingo.
Saving for retirement shouldn’t cause you any undue stress or anxiety. In most instances you can automate your withdraws, savings and allocations.
The worst thing you can do is not start saving for retirement. The most important thing you can do is to start. The earlier the better, too.
Here is a beginners guide to types of accounts you can use to save for retirement.
Types of retirement savings:
These Individual Retirement Accounts can be opened by any individual through a broker, a robo-advisor or independently. You can open this regardless of where you work. There are two common types of IRAs, the first is a traditional IRA, which is tax-deductible. The second is a Roth IRA, which uses after tax money. Another option is a SEP IRA, this is for self-employed individuals.
401(k) and 403(b)
A 401(k) is an account you get through your employer with typically limited choices of investment options compared to an IRA. A 403(b) account is similar to a 401(k) but is offered through educational institutions or a non-profit. Both of these can be in the form of traditional or Roth, depending on what your company offers. Many times employers offer to match your retirement contributions up to a certain percentage. If this is the case this is very beneficial to your portfolio.
457/Deferred Compensation Plans
457s and deferred compensation plans are typically offered by state and local governments and some nonprofits. You deposit pre-tax dollars that compound without being taxed until they are taken out.
Health Savings Accounts can save money to pay for deductibles and other medical expenses tax-free. Otherwise once you turn 65 your HSA acts like a traditional IRA.
Taxable Investment Account/Brokerage Account
These accounts are taxable investments in which you can put as much money in them as you want and take out money whenever you want. The downside to these accounts is that you will be paying taxes on any money this account earns.
Buying rental properties can be a great way to create passive income in retirement. Always make sure the numbers make sense before purchasing a rental property.
Knowing the accounts offered to you is a great place to start. From here you can figure out how to use these to fund your retirement.