So in addition to everything else 20-somethings have to deal with, like graduating college, finding a job and moving away from home, we ALSO have to save for the future. And no, I don’t mean your future children’s college fund – although that’s something we may have to think about too (even though ATM the idea of even pushing a child out of my body scares the daylights out of me). I’m talking about retirement.
That’s right. Apparently, you’re supposed to start saving for 50+ years down the line in your 20’s. This came as a shocking surprise to me since I can barely plan what I’m doing for the next hour, let alone decades down the line. Although it freaks me out to think about getting
saggy older, to not be as sharp or energetic as I am now and having to work because I didn’t save enough while I was young.
The fact of the matter is, we all have to start thinking about retirement – and if you haven’t started yet, no fear. You can start today with the tips in this article. I started putting money away for retirement the minute I graduated college and I’ve been pleasantly surprised with the power of compounding (the idea that if you invest small amounts of money consistently over time, it will grow at a faster pace, because your small earnings are reinvested).
It’s interesting that the mere fact that you can be making a lot of money at your job, or even a decent amount of money, isn’t really enough to set you up for the future. You have to start putting money away in one of the fashions listed below.
The coolest part for me is that because you are putting your money away, you never really miss it. It’s all automatic. As we discussed in my article about paying your bills on time, this makes investing and saving SO easy.
>> RELATED: Tricks to Paying Your Bills (On Time!)
OPTION 1: PUT MONEY AWAY IN A 401K
A 401K is a way to save pre-tax for retirement. There are a few important things to note about investing in a 401K.
- The money you put away in your 401K is untouchable until you are 59 and a half.
- The maximum amount you can invest in your 401K in 2018 is $18,500.
- The money is pre-tax (for now). What does this mean? This means if you were to get $1 of money TODAY from your company, it would be taxed. With that tax, you would only likely take home approx. $0.70. If you put money in your 401K, the full $1 goes in. That being said, when you take money out of your 401K when you are older, you are taxed at the income tax rate of your future self. The first question you need to answer when starting to save for a 401k is: does my company have 401k Matching?!
401K Matching is when your employer matches up to a percentage of your salary to put straight into your 401K. You choose how much YOU want to put in, however, the company normally has a matching cap. As mentioned above, the max to be in is $18,500.
Normally, when a company has 401K matching, they also have some sort of investment option with the 401K. This means they are investing the money for you. If your company has 401K matching, you are freaking lucky. This is rare and a huge benefit.
Let’s say your company matches up to 5% of your salary when you put it away towards your 401K. This means as you put 5% of your salary away towards your 401K, your company will match that same percent. THIS MEANS YOU ARE GETTING FREE $MONEY$.
To make this even simpler, let’s say your salary is $100. If you invest $5 in your companies 401K options, they will match, and give you $5, in addition to the money you put in.
Last time I’ll say this, IF YOUR COMPANY MATCHES, DO IT. THIS IS FREE MONEY. FREE. $$$$$$.
401K WITHOUT MATCHING
Again, a 401K is a way to invest for retirement pre-tax, while not being able to touch the money until you are 59 and a half years old.
Most employers have a 401K option, so it’s certainly something you can check! If you want to invest this way you, you will define a certain percentage of your salary to be automatically invested in the options they outline.
Make sure to look at your investment options and any fees before choosing this option. I’ve read that some employer plans can potentially have high fees. Once you set it up, the funds will go into directly into any choice you make. This is easier than an IRA, because you set it and forget it! BUT, you may have fewer investment options.
OPTION 2: OPENING AN IRA
An IRA is a way to invest & save that is separate from your employer. You do this by opening up an account with a major brokerage firm, like Vanguard, Fidelity or Morgan Stanley. With IRA’s, you pick your investments. You pick what goes in there. It can be gold or even real estate. The brokerage firm of your choice will likely have an option of a “type of account” that is an IRA. You can only invest $5,500 a year in an IRA.
Similar to a 401K, there is a specific circumstance in which you can take money out of your IRA. You can take money out of your IRA if you are buying a home for the first time, for some education expenses, medical expenses, etc. To read the full list of why you can take money out, see this list.
There are two different types of IRA’s, a Roth IRA and a regular IRA.
A Roth IRA means that you are taxed on the money you put into the account NOW. In theory, we all hope as we get older, we will be making more money, which means we will be in a higher tax bracket. So, if you want to avoid potentially higher taxes as you have more income, you ideally want a Roth IRA.
If want to put money in pre-tax, you would choose a regular IRA. This means you are opting in to be taxed when you take the money out.
Either way, IRA’s usually have pretty low fees. This makes them a great option!
What other retirement questions do you have? Are you confused? Stressed the F out?! Put them in the comments below! Can’t wait to hear from you.