Do you think you are too young to worry about saving for retirement? Think again. Planning and investing for retirement should begin when you are young and earning a salary. By building a cushion during the apex of your career, you can set yourself up to enjoy your ideal retirement lifestyle. Consider these retirement investment options to ensure you are well prepared when the time comes.
The earlier you prepare for retirement, the better. First, money invested over a long period of time benefits from the law of compounding. Basically, as you earn money on an investment, the earnings can be reinvested. This increases the level of total funds invested, and this larger sum generates a higher level of earnings than the initial investment. The cycle continues, and ultimately, a modest sum of money can grow significantly over a long period of time.
Additionally, when you invest money years before you need to take it out, you can assume more risk. In the long run, higher-risk portfolios have historically outperformed more conservative investments. Because you have enough time to weather the dips and spikes, you can afford to pursue this approach.
Take Advantage of Your Company Plan
If your employer offers a 401(k) plan, you are able to invest pre-tax dollars. The money is taken directly from your paycheck, so it requires no action on your part. It’s a painless way to invest because most people don’t even notice the difference.
If your company offers to match your contribution, you should take advantage by investing at least as much as the firm is willing to match. For example, if company policy dictates that up to 5% of your salary will be matched, it is wise to invest at least 5% yourself. If you invest less, you essentially miss out on free money that your company is willing to give you.
Start an IRA
Whether or not your firm offers a 401(k) plan or not, you may also want to consider establishing an individual retirement account (IRA). As long as your income level satisfies the legal requirements, you can choose between a traditional IRA or a Roth account.
A traditional plan allows you to contribute pre-tax dollars that grows tax-deferred until you take the money out during your retirement. Since your tax bracket will likely be lower during that time of your life, many people find this arrangement to be beneficial.
A Roth IRA is another popular option. This type of account requires that you pay taxes up-front, but all earnings are exempt from future taxation. If you get an early start and have many years for your money to grow, this option can save you a lot of money in the long run.
It’s never too soon to start investing for your retirement. When you finally have the time and flexibility to pursue the lifestyle of your dreams, you don’t want money issues to stand in your way. By starting early, taking advantage of company plans, and setting up your own IRA, you can build a financial cushion that will give you the security and freedom you deserve during your later years.