Retirement in the minds of many is rounds of golf, walks on the beach, fancy drinks, and not a care in the world. In order to reach that goal, one must first work out a way to save up enough money to live care-free. This is something you can do if you get started early enough and are disciplined about sticking to your plan. For the vast majority of us this plan must include some investing.
Why You Should Invest and Do So As Early As Possible
Unless you just happen to have been born to a family that was already quite wealthy, you can expect that you will need to find a way to make your own money and make it on your way to financial freedom. This means putting in the time to invest and let your money grow more money for you.
The earlier that you invest the better because it gives your money more time to grow and to accrue compound interest. Compound interest is so powerful that it is reported that Albert Einstein himself called it the eighth wonder of the world. There is little question that it is the snowball effect that helps many people make their wages grow into something much more impressive. There are a few compound interest calculators you can use to see the magic.
How to Invest for Retirement
Retirement investing is something that everyone should be doing no matter their age. Even if you are in your twenties it is already time to be thinking about investing for the future. The way you invest in your twenties versus how you invest in your fifties or sixties will be different, but there is no question that you need to get started right away.
Many people use the investment vehicles offered by their employers to get started. There is nothing wrong with this approach at all. In fact, this may be the best way to go if there is a company match involved. That company match is free money that you would not otherwise be getting, and there is nothing wrong with that. However, within the company 401(k) program are a number of options for you to consider.
Making The 401(k) Less Complicated
The company 401(k) program no doubt looks incredibly complicated to someone who has not dealt with one in the past. They may not even act on it because they are simply intimidated by everything that is going on with it. That should not be the case. These programs can be explained and understood by anyone willing to put the time into it.
The basic idea is that the company you work for has contracted with a 401(k) provider to provide you and your co-workers with the option to invest in the plan to earn a return that you can use towards your retirement. Within the plan there are a variety of investment choices which you can select from. You will want to review these options on your own or with the plan administrator.
Which Selections Make Sense for Me?
It will depend heavily on which options are included in your employer’s 401(k) offerings as well as your age and when you plan to retire. The more aggressive options may be an excellent choice for people who have many years before they can retire. This gives your retirement funds the potential to grow faster but also carry more risk with them. However, someone who is just getting started out has the time to recover from a market downturn if one should impact their holdings.
If you do not want to choose your own funds, there are “Target date” funds provided within the online brokerage plan. This type of fund adjusts your portfolio so it becomes more conservative as you get closer to retirement age. This is supposed to create an “auto pilot” feel to investing. Some people prefer this rather than having to calculate their risk too heavily. It can be helpful to someone who does not want to spend much time researching funds.
Roth IRA or Traditional IRA?
Another thing to look at when investing for retirement is if you should go with a Roth IRA or a traditional one.
The difference between the two is critical when it comes to taxes. In a traditional IRA, you invest in with pre-tax earnings. When you are ready to withdraw your earnings at retirement you will be taxed on them at that point. That could be a lot of money paid in taxes if you have kept up with your account and contributed to it like you were supposed to.
In a Roth IRA, you invest money that has already been taxed. Thus, when you go to withdrawal your money at retirement it is tax-free. That can be a huge savings on taxes, but is only the most useful for someone who is getting started with their investing at a younger age. The impact for them will be the largest.
Those who are closer to retirement may want to go with the traditional option. If your employer does not offer a Roth IRA there are many companies where you can open one on your own. A Roth IRA complements an employer 401k extremely well.
Remember How Long You Will Need Your Retirement Money
Keep in mind that you should try to save as much as you possibly can for retirement now. People are living much longer now so the sooner you start the better! Just keep contributing and watching the money grow considerably over time. No matter what type of fund you choose, PLEASE try not to take out of it early. There are penalties for 401k and although there are no penalties for a Roth IRA just remember you will need that money later.
Do you have a retirement fund already? If so, what type of savings account do you have?
Andrew is the editor-in-chief of a website SlickBucks.com. Via the site, he hopes to help and inspire people who wish to grow their wealth. To do so, he shares practical advice, reviews and tips on how to reach the type of success one desires.
