How to Retire Rich
“Retire? But I just started my career!” you say, somewhat incredulously. Yes, while retirement seems far-off (and it is!), you can take steps now to plan for it. (After working hard for decades, you don’t want to be on food stamps in your golden years, do you?) Here are four tips to get you started.
Recognize the need to save. Saving can be hard, especially when you really, really want those Manolos. But think of it this way: If you plan to retire at 65 but you live to be 85, you’ll have to support yourself for 20 years. In other words, you have 40-plus years in the working world to save enough to live comfortably for 20 years with no income. See what you’re up against? Put the shoes back.
Start small. When you’ve barely entered the working world, saving can end up dead last on your priority list. You’ve got to pay off college credit-card debts, school loans, a new car, etc. This is all true, but so is this: The earlier you start saving for retirement, the better. Setting aside money in your 20s, as opposed to your 30s, will give it more time to accrue interest. See if you can squeeze $50 a month toward retirement. When you’ve adjusted to that, check into putting more aside.
Understand your 401(k). Many employers offer this retirement plan. If yours does, make sure you’re taking full advantage of it. A 401(k) gives you investment options. You can choose how your funds will be allocated, ranging from low-risk options to higher-risk ones. The earnings that build in the account will be tax-free until you withdraw them. Many employers agree to match a certain percentage of your contribution. This benefit can give you a big boost. Say you contribute 6% of your income and your employer offers a 50% match. If you earn $100,000 in a year, you’ll put $6,000 in the plan ($100,000 x .06). Your employer will tack on an additional $3,000 ($6,000 x .50). That’s a total of $9,000 invested toward your future.
It’s common to switch jobs frequently during the early years of your career. If you move to a different company, don’t immediately cash out your 401(k). Ask if you can switch the plan over to your new employer. Look into the company’s benefits, and ask a financial adviser about your options.
Consider other investments. An Individual Retirement Account, or IRA, is another way to plan for the later years. In a traditional IRA, you can contribute up to a certain amount each year. The money you invest is not immediately taxed. If you earn $50,000 a year and put $3,000 in the account, you’ll pay income tax on only $47,000. The money will be taxed when you withdraw it.
A Roth IRA also allows you to contribute a portion of your income every year. However, you cannot deduct it from your income when tax time rolls around. Using the same example, if you earn 50 grand and deposit three grand into the Roth, you’ll still have to pay income tax on $50,000. But there’s good news about the Roth IRA: When you take out the money and the accumulated earnings, it will be tax-free. Both of these plans have pluses and minuses, so check with your financial planner before opening an account.
It’s easy to think of retirement as eons away—and it is. But it’s the perfect time to start getting ready for it. Invest now, and you’ll be able to live your later years the same way you’re living now: in style.