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I was talking to a friend today and he posed the question, “When you are 80 years old, what will you want to say that you have done in your life?”
I love this question and after going over New Year’s Resolutions, I have thought of this question in terms of the next year. Short-term and long-term goals are both important.
As the Cheshire Cat said, “If you don’t know where you’re going, any road will get you there.”
To have a clear idea of where you are going is half of the work. Once you have that down, you can take the necessary steps to get there instead of blindly going down a road and ending up somewhere nice, but not where you could have been.
Thinking about the next 60 (or 75) years, I have many dreams and goals I would like to accomplish. One of my bigger goals is to have financial freedom by the time I am in my early 50s.
Of course, the dream is before then, but if I can pull that off, I will be a happy camper.
What do I mean by financial freedom?
I mean not living paycheck to paycheck in order to pay bills. I want to have plenty of money to pay monthly bills and then an excess of income to live luxuriously – travel the rest of the world with my husband (because we plan to see a lot of it before then as well), spoil my kids (and/or grandkids), and continue to invest in ourselves and our hobbies as a couple.
I don’t want to ever be limited because of finances by the time I retire. There are a lot of ways to get to financial freedom and preparing retirement savings plans is one of them.
Saving for Retirement
I am young. I have learned about retirement from the success of older adults in my life, books, and online resources. It is something I started working towards at the ripe age of 22. While I know not everyone is able to do that, I think it’s important to:
- Start thinking about retirement
- Once you have some money to put away, do it as soon as possible
People wait too long and even saving an extra hundred a month early on makes a difference.
I remember that when I first thought to start my retirement savings, I was about 18 and as I said, I was 22 when I actually did it. So, I know what it is like to say something and then never get around to doing it.
I promise it is not so scary. I will give you some advice from my personal life to get you to start thinking about the process and ways to start accomplishing it.
So, where do you put that money?
Disclaimer: I am not a financial adviser, just a passionate saver.
Roth IRA and Traditional IRA
I have not had a steady job that offers a 401(k) (more on this next) which is what a lot of corporate people use to make their retirement plans. Because I never had the opportunity of contributing to a 401(k), my retirement plan thus far besides saving has been to contribute to a Roth IRA.
Here are some basics about a Roth IRA that I have learned. Roth IRAs are managed through a financial adviser. Your money can be put into stocks, mutual funds, ETFs, fixed rate plans, etc. and over time, your money grows. You can put $5,500/year into it. $6,500 if you are 50 or older. A Roth IRA is tax-free after 59 1/2. If I choose to take out money before that age, it gets taxed at 10%.
This means that when I choose to withdraw money after I turn 59 1/2 from my Roth IRA, I will not have to pay taxes on that money. You get taxed on the money upfront, as in from your current paycheck, but once you take it out later, nothing.
How nice would that be – getting a paycheck with no taxes taken out?
A traditional IRA differs in that the money you take out is taxed once you choose to withdraw at your retirement, but your traditional IRA contributions now are generally tax deductible. Meaning, if you make $50,000/year currently and put $5,000 into your IRA, then when doing your taxes, your tax bracket will be that of a $45,000 income last year instead of $50,000. But, when you retire and take money out of your traditional IRA, you will get taxed.
Because of exponential growth, time is on your side as with all long-term savings plans. The latter years of an investment are when your money grows exponentially. It is such a large sum 30 years down the road that 8% looks much better on that sum than it does when you first begin saving.
For example, say you put $15,000 into your Roth IRA over a period of 5 years since you have been working (that is about $250 a month). You are now 30 and you never put another dime in. Your average rate of return has been 8% and you retire at 65. Your balance would be worth about $221,000. Say you live another 25 years. You could receive a little more than $700/month from your Roth IRA (tax-free!).
If you started 5 years earlier at 20 and by the time you are 25, have saved up the same $15,000 and not a dime more goes in, the worth of your Roth IRA at 65 is about $325,000. This leaves you with about $1100/month for the next 25 years.
So, you can see what a difference even 5 years makes.
Now assume that you are aggressively choosing to put at least a portion of your money away until retirement. You can end up with over a million dollars (or two or three or four) with interest.
Play around with a Roth IRA calculator to start dreaming.
401(k) or 403(b)
While I have not had much experience with a 401(k) or 403(b) and will only just be starting a job that provides access to a 401(k), I know a little about them from research as I mentioned and from my mom as a tax preparer.
I won’t talk about a 401(b) much, but I wanted to mention it because it is similar to a 401(k). The only distinction that I will make (and that I really know of) is that a 401(b) is offered to certain employees of public schools and tax-exempt organizations while a 401(k) is offered for employees of public entities.
A 401(k) is another retirement savings plan that allows contributions to be made out of your paycheck before taxes are taken out. There are different plans to choose from and different options of how to invest your money into mutual funds.
The major benefit I repeatedly hear about a 401(k) is that employers will typically match a percentage of an employee’s gross pay.
What is matching? Say the employer will contribute 3%. If you make $50,000/year before taxes, then the employer will match up to $1,500. Meaning that if you contribute $1,500 to your 401(k), then your company will also contribute $1,500, totaling $3,000 when it only cost you $1,500.
This equates to free money into your retirement. It is an added benefit to contributing to a 401(k).
The biggest advice for anyone who has the opportunity to have their funds matched by a company is to max out that percentage. If that percentage is at the high of 6%, make that a goal to hit each year.
The maximum that you can contribute to a 401(k) is $18,000/year. Like the traditional IRA, your 401(k) contributions are tax deductible which puts you in a lower tax bracket. You also get a tax credit for contributing to your 401(k). Unfortunately also like the traditional IRA, this money is federally taxed once you start withdrawing at retirement.
I will talk about this briefly since this is one way that retirement savings plans can be invested and is something you can choose to do on your own if desired.
A mutual fund is a portfolio of stocks that are grouped together and professionally managed. If you open an investment account with a brokerage company, you have access to buying things such as stocks and mutual funds.
I carry advice from my grandpa about brokerage accounts to buy an investment and leave it alone. Don’t take money out. Don’t sell it. Just keep it in there for years (preferably until retirement).
Like the retirement savings plans, time is on your side with this one. Your money can grow exponentially.
Investment companies have online research tools where you can look up these different investments like mutual funds and see there history since inception. They will give you a lot of information about them – what stocks are in the funds, the professionals who run the funds, the costs. They even give investments a risk assessment and tell you if it is high, low, or medium risk based on its history.
The mutual funds with the highest since-inception percentages (upwards of 14%) are the way to go. Once you see one you like, you choose the amount you want to buy and as we all know, when the market for the stocks involved in these funds rises, your money increases. As the market falls, your money decreases.
If you don’t feel comfortable doing it on your own, talk to a financial adviser about investing in mutual funds if you have money for it.
Basics To Get Started Saving
We have talked about three ways of putting money away for retirement. If you do not have the option of 401(k) contributions, you still have a great option of opening a Roth IRA account. If you have the option for both, here is some advice for that.
Before you focus on aggressively building up your retirement plans, take care of debt. Whether it is from credit cards, student loans, or car payments. Focus on budgeting your money with a basic budget. You will know exactly where your money is going and you will be able to pay down debt.
Once your debt is paid down and you follow a budget, you will have a better understanding of how much you are able to invest a month.
A good rule of thumb when you have extra funds to invest is that 15% of your take-home income should go towards retirement.
If you only have the option of having a Roth IRA, put every dollar of your 15% into your Roth IRA until you max it out at $5,500 a year. If your 15% is more than that, then think about opening an investment account with a company and buy some mutual funds. If you don’t feel comfortable with that, put that money into a savings account where it can collect some interest. Some online banks have great interest rates that are 100x that of brick and mortar banks. And since your money is in an online account, you will be less tempted to take it out of savings.
If you have the option of having both a Roth IRA and a 401(k), here is what you do with your 15%. Whatever your company matches, put that money into your 401(k) right off the bat. After you max out on what your company will match, put the remaining money into your Roth IRA. If you max out at $5,500 for the year and you still have money left with your 15%, then continue putting money into your 401(k) until you have used up the 15%. This way, you get free money from your employer, your Roth IRA will be better in the long run in that you won’t have taxes taken out once you choose to start withdrawing after 59 1/2, and you will continue building up your retirement savings plan with the rest of your 15%.
Find a successful and trustworthy financial adviser. I chose to open a Roth IRA account with a financial adviser that both my dad and grandpa had successful retirement plans with.
Ask successful adult figures about who they would recommend and what has worked for them.
There are some basics of what I have learned about retirement and some good starter ideas of what you can do to start saving for retirement. I know that it can be overwhelming to think about, but it doesn’t have to be.
Again, I am not a financial adviser and these are only things that I have learned. If you get a financial adviser, they can answer in-depth questions and go over exactly what will happen with each financial decision you make.
What are you going to do today to start saving for retirement?