Posted on February 9, 2017 in Advice
Early In Your Career? Start Saving Now!
Odds are, if you’re early in your career, then retirement planning isn’t the first thing on your mind. After all, you may still be paying student loans, and dealing with credit card debt. Then there are your rent and other expenses. You may have joined the employment bandwagon during a difficult economic time, and hence are tied up with a job that is paying less than you deserve. You might wonder, why add to the woes and bother about retirement when it’s decades away?
The answer is simple: If you start preparing now, you are taking an essential step that can potentially make your life financially manageable in the long run. Since you’re young and have time on your side, anything you save today will potentially grow for tomorrow. You’ll also profit from the power of compounding. That is, your savings gain interest, and that added money will earn interest as well.
So where to start? A few things to consider for retirement planning are as follows:
Step 1: Leverage the years
You’ve heard it before, but listen up again. While you’re in your 20s, time is surely your ally. The power of compounding can aid your cash to grow in a way like it will never grow again.
Step 2: Save more
It might seem like a sacrifice to save 20% of your pay momentarily. But think of it this way. By saving as much as you can while there are fewer requirements on your income (compared to your 50s, when you may have kids in college), you place yourself much ahead in the race to save more.
One no-brainer plan to save further is to sign up for auto-increases in your 401k so that every year you’re automatically advancing your contribution rate.
Step 3: Be aggressive
Palmer remarks that amongst 20-something investors, two in ten have their money invested in a money market or stable value fund.
While placing your money into equities does involve more risk, it also equips you with more growth. This is at a point in life when you need the growth and can reasonably handle the risk. By staying more conservative, you risk losing out on market profits and thus jeopardizing your savings.
Step 4: Pick Retirement and Investment Plans
Take a glimpse at these possibilities which will help you secure your future:
- 401(k): The major advantage of a 401(k) is that you don’t pay taxes on your investment until you begin taking money out from the account. Probably, by the time you start taking it out as a retiree, you won’t have income and your tax bracket will be lower. Hence, you’ll probably save money even while paying taxes on your 401(k).
- Traditional IRA: The Traditional IRA is funded with pretax money. So you don’t pay taxes on that money immediately, but you will when you withdraw it during retirement. You can invest a maximum of $5,500 per year into this account.
- Roth IRA: A Roth IRA is funded with money after you’ve paid taxes. The best advantage of a Roth IRA is that when you withdraw during retirement, you won’t have to pay any added taxes on the profits made on your investment’s growth. You can invest a maximum of $5,500 per year into this account.
- SEP IRA: If you’re self-employed, you should really consider the SEP IRA. The best highlight of a SEP IRA is that you are able to invest up to 25% of your income or up to $53,000 per year.
- Rollover IRA: A Rollover IRA is a type of traditional IRA. If you leave a job and have a 401(k) but you’d like to change your investments, you can roll your 401(k) money into a Rollover IRA. Rolling over your 401(k) money can come with some stern conditions.
Start a retirement account (self-directed IRA as soon as you start earning). An unbelievable 44 percent of young millennial, ageing 18 to 24 have $0 in their savings accounts. Either that or they don’t have a savings account at all. If you don’t hold a 401k, you can get going in the right direction by opening a Roth or traditional IRA.
Do what it takes to commence saving in your 20s, and you’ll be equipped for whatever life brings, be it marriage or children or a new place. More importantly, you’ll be stabilizing yourself financially for retirement. And that is a huge payoff you’ll achieve for planning ahead. It’ll be one of the best gifts you can give yourself, in your later years.
Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning, and over the last 10 years has turned his focus to self-directed accounts and alternative investments.
Rick regularly posts helpful tips and articles on his blog at SD Retirement as well as MoneyForLunch, Biggerpocket, SocialMediaToday, WealthManagement, SeekingAlpha, and NuWireInvestor.