After reading the title of this article, you might be thinking, “Why should I care about retirement right now? I have plenty of time to save for the future.” And you’re right! Sort of.
Most likely, if you’re reading this, you’re a young, 18–22 year old who’s just starting adulthood. You’re probably worried about discovering your interests, declaring a major, and figuring out what you want to do post–graduation; you aren’t thinking about where you’ll be when you’re 65. However, right now is the perfect time to start saving for retirement.
You might be wondering why you should start planning for retirement at a time when you probably don’t have a stable career or source of income. It probably doesn’t seem worth the effort to save up a small amount of money each month. However, the best time to start saving for retirement is as soon as possible! The sooner you start saving, the longer you have to start accumulating funds and interest for retirement.
According to Nationwide, the average American starts saving for retirement at the age of 31. So, if you start planning for retirement now, you could potentially save for over a decade longer than the average worker! If you start saving at the age of 23 instead of 31, with a $100 contribution per month, you’d have $88,572 more. So, the longer you save for retirement, the more time your money has to be invested and garner interest—this is called compounding.
Want to know where to begin? Keep reading!
The key to saving for retirement is investing. If you’re anything like me, the thought of investing and losing all your savings probably terrifies you. Investing in the stock market looks complicated and hard to master, but there’s an easy and secure way to start investing now—I recommend opening up a Roth IRA.
A Roth IRA is an individual retirement account that’s funded by after–tax dollars and has advantages like tax–free growth on your investments and tax–free withdrawals. This differs from a traditional IRA, where funds are pre–taxed and withdrawals are also taxed. Roth IRAs are ideal if you think your current taxes are lower than they will be when you retire. This may sound complicated, but essentially, you want to open a Roth IRA to maximize benefits and profit!
Now, you need to find a place to open a Roth IRA. I personally use Fidelity, but most banks and brokerage firms offer a Roth IRA. Good Financial Cents provides a list of financial companies that offer the best Roth IRA accounts. A key thing to look out for is low costs, including $0 per trade. Those fees can eat up your profit!
Opening a Roth IRA is similar to opening up a normal bank account. Most likely, you can easily sign up online by providing routine information such as your social security number and other identifying information. Once you have your Roth IRA, it’s time to start putting money into it. You want to connect your bank account to your new Roth IRA account; this may take a few days.
Roth IRAs are a powerful tool in the investment world, so the amount of money you can contribute is limited. You can only contribute up to $6000 a year, and only if your income as an individual is under $140,000 a year. As a student, contributing $6000 a year is impossible for me, so I contribute as much as I can, which is around $50 a month. This may seem small, but I promise it all adds up over time!
So now you have a funded Roth IRA account. What’s next? Well, you need to start investing your money! You have a few options. The first option is the hands–on method. Here, you can try your hand at trading individual stocks and options. This involves intensive research and is time–consuming, and if you’re not an expert it can be like taking a shot in the dark. I personally don’t want to be too hands–on with my investing, so I choose to instead invest through index funds.
Index funds are “a type of mutual fund or exchange–traded fund (ETF) with a portfolio constructed to match or track the components of a financial market index.” In layman’s terms, these are portfolios managed by professional money managers, who determine which stocks to invest in.
By investing in an index fund, you’re putting your money into a large pool of companies, instead of singular stocks. I personally like this method, as it provides more security and promise of growth. Do some preliminary research yourself, but I recommend index funds such as FXAIX or SWTSX.
Congratulations! You’ve now officially begun to save for retirement. Simply continue to fund your account over the next few decades, and watch your money grow! If you’re successful, you should see at least an average return of seven percent a year. Money Under 30 provides a calculator where you can see how much your invested money can grow. Once you turn 59 ½, you can take out your investments tax–free!
Like many of you, I was once new to investing. I learned through online resources such as Dave Ramsey, The Money CEO, and Nerd Wallet. Investing may seem tricky at first, but it’s super simple once you get started. I hope this helps, and I wish you luck!