It’s Not Too Early- Planning for Retirement
We just joined the workforce, how should we plan for retirement already? The answer is simple: you have to start saving as soon as possible. This will give your money more time to grow and compound and with retirement so far off, you are able to be more aggressive with your investments. According to Forbes, every seven years you fail to save towards retirement, it could cut your assets in half.
Now, everyone’s retirement plan will be different. It is dependent on the lifestyle you would like to maintain in your retirement.
There are a variety of retirement accounts and you have to choose what is right for you. A good retirement plan is also something you have to constantly re-evaluate to ensure that your goal is consistent with the lifestyle you wish to maintain after retiring.
401(k) or 403(b)- Offered by your employer, most common tool to help young professionals start saving for retirement. Some companies will match your savings, which is really something to take advantage of. Keep in mind, this is pre-tax money and it reduces the income tax that year. However, once you start taking distributions from your 401(k), it will be taxed at your income bracket. This is something to watch out for because income tax is taxed at least 10% higher than capital gains tax. This tax could also affect a portion of your Social Security (up to 85%) and make it taxable as well.
Solo 401(k)- Entrepreneurs should look at this option. A sole proprietor can contribute to this account as both employer and employee, thus you can double your contributions and it may have some tax benefits.
SEP IRA- Ideal for someone who is self-employed. All employees (if any) must receive the same benefits.
Simple IRA- It’s a tax-deferred account that small employers can provide. Employers are required to either match or make nonelective contributions.
IRA- You can contribute up to $5,500 a year. This is after tax money
Roth IRA- This is a qualified account so you can only start a Roth IRA if you are at a certain income level. You can contribute up to $5,500 a year. Since this is after tax money, your contributions are tax free. The thing that differentiates a Roth IRA from a traditional IRA is that, earnings are also tax-free in a Roth IRA account when you take money out after you are 59.5 years old.
These are the most common securities accounts for retirement. There are a lot of options out there and you really have to see what is right for you. The key takeaway here is just to start saving ASAP. Other retirement plans include insurance and annuities and I will touch on that in another blog post so look out for part 2.