Master Your Retirement
Today we’re going to talk about retirement! Did you know that you can retire early? You can actually retire at any time you want if you plan it out and save save save. There are a number of early retirement blogs out there—one of my favorites is Mr. Money Mustache.
But today we’re going to focus on “regular” retirement, although these concepts apply to early retirement as well. The main idea is that you should start saving for retirement as early as possible and save as much as possible. The earlier you save, the better off you will be!
When you’re young (and you should do this even if you’re not so young), max out your retirement accounts. If your employer has a retirement plan, invest in it! Especially if your employer offers some sort of match—don’t miss out on that free money! If your employer doesn’t have a retirement plan (or even if they do and you want to save extra money), invest in an IRA, which is an individual retirement account that you can set up on your own to save money for retirement.
There are two types of IRAs:
• Traditional IRA: contributions that you make to a traditional IRA are tax deductible, and you pay taxes when you withdraw the money.
• Roth IRA: contributions you make to a Roth IRA are not tax deductible, but you do not pay taxes when you withdraw the money (there are also certain income limits on investing in this type of IRA).
Research additional details about each option or check with your financial planner to figure out which is best for you.
One of the benefits of saving early for retirement is that you’ll get to take full advantage of compound interest, where interest is earned on the initial amount plus the interest you’ve already accumulated—interest on top of interest!
We can take a closer look at compound interest with an example. Let’s say you save $20,000 at age 25 with a 7% annual compound interest rate. Then by age 60, that initial $20,000 will have grown to $213,531!! If you saved the same amount 10 years later at age 35, you would have over $100,000 less by age 60. The earlier you save and invest, the better off you will be later.
Now, retirement accounts are usually invested in stocks and bonds rather than in a savings account with a compound interest rate. However, the same principle applies, since as the value of the account goes up, more stocks are purchased, and then the value will go up again on those additional stocks. In general, the stock market increases over the long term, so it’s important to also consider your current age, the age at which you wish to retire, and your risk tolerance as you consider where to invest your retirement savings.
Many retirement plans offer “target date funds,” which are combinations of stocks and bonds that adjust automatically based on the current year and the year in which you plan to retire. These are a great option if you do not want to manually check and rebalance your retirement portfolio each year (or every six months). If you enjoy managing your own portfolio, then make sure you know the split of stocks and bonds that is right for your current risk tolerance and age and stick to that distribution—don’t react to market ups and downs.
Tomorrow we’ll talk about the basics of investing—see you then!
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