Best options to save for retirement?

Like exercising, you JUST have to trust that short-term choices will lead you where you want to go. Same goes for money choices.The extra beauty for saving retirement EARLY? The benefits grow exponentially. If you start early in your earning years, you’ll bank serious money to spend in your burning years (AKA retirement).

Q: It seems weird to think about retirement just as I start my career. Why’s it such a priority now? 

First, know that there’s a limit to how much you (and anyone under 50) can contribute to your retirement accounts each year:

• IRA + ROTH: $6,000 across the two accounts

• 401(k) + ROTH 401(k): $19,500

Why is that important to highlight? Because if you decide to wait years before getting a jump on saving for retirement, playing catch-up by banking larger amounts later is made harder by these annual limits.  

Refresher...IRAs & 401(k) are investment accounts (just like any kind of investing) but specifically earmarked for use only at retirement. You can of course squirrel away cash every month to save for the future, but we know  there's a difference between saving money and building wealth. 

Bottom line…The sooner you start investing the longer time period you have for your money to grow. Here’s some fun math:

If your goal is to have $1M at age 65 and, starting at 20, you invest ~$4,500 each year ($375 each month), you'll hit the million-dollar goal no problem because, compounding interest (AKA when the "returns" off your investments is calculated against a larger and larger base).

Q: I hear "tax benefits" in the same sentence as "retirement savings" a lot. Why? 

Where retirement is concerned, the longer your money’s invested there, the longer you don’t have to pay “capital gains tax” (the gov’s cut of your investing profits). Intrigued?

The government gives us a pat on the back (tax break) when we do something good, like give to charity or save for retirement. In order to incentivize you to put money away, the gov lets your investments grow tax free.

Translation: When you “buy low now and sell high later” the gov takes a cut of that profit (capital gains). The assumption is your investments WILL grow - the markets always have over decades. So the gov gives you various ways to hand over less tax dollars depending on how you invest for retirement.

Here are your options for retirement accounts:

1. IRA
Anyone who earns can have this type of retirement account. Comes in 2 flavors - both grow tax free but WHEN you catch that tax break differs:

Traditional IRA - Money you contribute each year is tax-deductible (avoids taxes). The fine print is that you must be under a certain income threshold; you pay tax when you withdraw the money at retirement.

ROTH IRA - Money you contribute isn't tax-deductible (doesn't lower your tax bill that year), but withdrawals at retirement are tax-free. Same fine print, you must be under a certain income threshold ($139K for a single filer in 2020). Meaning, the more you make, the less you can contribute. It differs from a traditional IRA in the fact that you DON’T pay taxes when you withdraw.

Making it real... If you think your income is lower at the START of your career vs. near retirement, Roth is for you. If your income begins to climb and you start thinking the reverse, go for Traditional. BONUS: If you like the sound of both, do both and max it out.

2. 401(k)
401(k) is a retirement fund you get from work. Investments grow tax free just like your IRA, but main added benefit is:

• Employer match: Free money from your employer. Sometimes companies match a certain amount of your contributions to this retirement fund.

Making it real... Picking between an IRA and 401(k)? Max out your 401(k) to get every last penny of your employer match. Once you are comfortable funding that (and still have excess liquid cash left over) open up an IRA.