Of course, retirement seems a long way off for someone just starting out in their career, but creating a long-term retirement savings strategy and then actually starting it is one of the smartest decisions you can make as a young person. After making sure you've got health insurance coverage and setting up a strategy to pay off high-interest debt, planning for your retirement is an essential step towards a secure retirement.
Compound interest on money you save in an Individual Retirement Account (IRA) or other kind of retirement savings vehicle will similar grow over time at an impressive pace. Take advantage of that compound growth by investing in your 20s rather than waiting until you’re closer to retirement and have less time for your money to grow!
So, what can you do now to be secure later?
- If your employer sponsors a retirement plan, and especially if your employer will match any contribution you make to the fund, that is absolutely your best option. Not signing up for a plan that includes employer contributions is like leaving money on the table!
- If the employer-sponsored option is not available to you, you can start a Roth IRA for yourself with a relatively small amount of savings. For example, it’s possible to open an account with a leading investment firm if you have $1000, but you will be charged a $10 annual fee. When your account balance reaches $5000 the annual fee disappears so it may make sense for you to save your money in a bank account (with no annual fee) until you reach the $5000 threshold. Or, if you would be too tempted to make withdrawals from a personal savings account, go ahead and start a Roth IRA with less than $5000 and the $10 annual fee will be an an incentive to contribute as much as you can afford.
- As was discussed is an earlier post, Roth IRAs are the best fit if you are currently in a low tax bracket but expect, or hope, to be in a higher-earning tax bracket by the time you are ready to retire. This is because Roth IRAs, as opposed to traditional IRAs, are set up such that you contribute after-tax income to the account (meaning, the amount of money you chose to contribute to a Roth IRA is not tax-exempt) but then don’t pay any taxes on the money you withdraw when you reach age 59½. Since taxes are generally expected to rise over time, this scheme essentially allows to you spend more of the retirement money you save on yourself rather than to pay taxes.
- Roth IRAs are also a valuable resource for young people because they allow you to start saving for your old age, but you don’t necessarily have to wait until your old age to use some of that money. For example, starting five years after you opened the account, you’re allowed to withdraw contributions from your Roth IRA (note: you can’t take out interest earned, only the money you originally deposited) to pay for expenses like certain necessary medical costs, to buy your first home, and to pay for higher education.