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The first thing I am going to tell you is that I am not a financial adviser and this blog post is simply my opinion, however, I feel that I have an important perspective to share with people who are considering starting a retirement savings plan. I have mixed feelings about retirement accounts, however, I am thankful for the accounts that I have already set up. Hopefully, there will come a day when I will use them for something amazing (we all hope).
I understand if it is all confusing or if you feel uncertain about creating a retirement plan. There are several downsides to retirement savings: essentially you are putting aside money that you may never have the opportunity to use, taxes are entitled to a large chunk for numerous types of accounts, retirement savings take away from the income you can use right now, and retirement savings are not guaranteed or secure. In a way, investing in a retirement account felt like gambling to me when I started out, especially when choosing riskier funds, but now that I know more about the process I can visualize the rewards. At the beginning, a lot about retirement accounts went right over my head, but after two years working for a retirement company some of it started to click.
Saving for retirement has some really amazing advantages as well: your future may be more secure; when you invest you have the opportunity to earn so much more than you could from a conservative savings account or other savings methods, and if there was an emergency you know that you have funds at your disposal. If you diversify your funds and choose a secure plan, you will see an increase over time, especially if you start an account young and let it sit.
I learned at a young age that I wanted to start saving for retirement in my early twenties instead of later in life. When you start in your twenties you may not have a lot to invest at first, but each small contribution truly adds up and increases your earning potential. I call this crock-pot or slow-cooker investing. Set it and forget it. If you didn’t have the opportunity to start in your twenties, it is never too late to start saving. If you work for a company with a retirement plan you are off to a good start, but for self-employed or stay-at-home mothers or caregivers, there are also many opportunities you may use to your advantage.
Right now it may feel so far away, but the one thing my older relatives always tell me is that time goes by fast. At this moment, picture what you want your future to look like. Where will you live? How will you live? How often will you travel? What kind of activities will you do? You need to raise funds for that future, just like you would to save up for a big vacation. If you are following along with my Year of Living Lovely journey and you do not have a retirement savings plan of your own, now is the time to start!
I am in no way an expert about retirement accounts or savings, but I have learned a few tips along the way while working for a retirement company and while opening my own retirement accounts. This is not a financial how-to guide, but rather, some ideas to get you thinking about your own retirement based on the knowledge I have accumulated along the way. When you do decide to open an account, consult a professional to learn more about which accounts are best for you and how to invest. I have accumulated tips of getting started, choosing funds, making contributions, and choosing an account. I hope that these thoughts are useful in your journey as you start your own retirement plan. .jpg)
Start Small
You don’t have to make big contributions from the beginning, but saving something is certainly better than saving nothing at all. If you are living paycheck-to-paycheck you can still benefit from a retirement plan down the road. I personally started with only $10 a month (that is only about $2.50 a week) when I opened my first IRA account and over time increased that payment to $50 a month. Saving only $10 a month is $120 a year and $50 a month is $600 a year. With certain funds you have the potential to earn more from those investments. You can increase or decrease your contributions as you earn more or less, but everyone has to start somewhere. Don’t let a small beginning stop you from even starting. My grandfather used to pick up every penny he saw when he was out. My aunt asked him why and he said, “Every penny you pick up is a penny that you didn’t have before.” Each one adds up.
Diversify
I’m not an expert, but I believe in the saying “don’t put all your eggs in one basket.” When you set up an account you can choose which funds to put your money into. Divide that money into at least a couple different funds so that you do not risk it all in one go. If one fund goes south, at least you will have others potentially earning for you.
This can also be said about retirement accounts all together. At the moment I have three different retirement accounts: one from the company that I used to work for (it is still accruing interest so I figured I would sit on it and let those eggs hatch), a Traditional IRA where I rolled my pension and 457 plan into when I quit my last job, and a Roth IRA that I set up for myself through my photography business that I still contribute to (in very small amounts, but its something!).
Conservative Vs. High Risk
When you set up an account you can choose among numerous funds to invest your money into. I highly suggest looking into the information for those funds. Do they support a company or something you believe in? Are they environmentally and morally responsible (do you want to support them and what they stand for)? Are they conservative or high risk?
Conservative means that they don’t usually make much interest, however, they’re often very safe funds that are not likely to fail. The risk for losing money with these funds are low, but so may be the earning potential.
High risk means that the returns for these funds often fluctuate, meaning you can lose a lot of the money that you invest in them or you can earn a lot. Sometimes the risk is worth the investment and you can make a lot of money from these investments. But then again, sometimes it isn’t.
When you’re younger, you have more time to earn so you can make more risks with your investing. The idea is that if you do lose out with a bad fund, you still have plenty of time to make it back up. If you are older and starting your retirement savings, experts recommend being more conservative as you won’t have time to make it up if you lose big.
If you’re somewhere in the middle between conservative and willing to make a high risk, consider putting a percentage (perhaps 25%) into an interest accumulation account, which is a fund similar to a savings account that only earns interest within the company you invest it in. You can then divide the rest of your investments between conservative and riskier funds.
Automatic Contributions
If you work for a company with a retirement plan, I highly recommend signing up for the plan with automatic contributions. The account is set up and taken care of for you by the company you work for, making enrollment easier. The automatic payments, especially smaller payments, will not be noticeably missed from your paycheck. You are saving without having to think about it. When I first started, I only contributed a small percentage from my bi-weekly paycheck. When I realized that I didn’t miss the money, I ended up increasing my contribution to 8% and then again to 10% and eventually 12%.
Matching Programs
Many businesses offer employee contribution matching programs. Usually I hear companies offer around a 3% match to your contribution (give or take) up to a certain amount, which means every time you have money put into your retirement account your company matches a part of that contribution as well. Take advantage of this free money and contribute as much as you can that they will match. It’s free money, say yes to it!
What does “vested” mean? When a company matches your retirement contribution it belongs to you, or does it? Many companies have a vesting period, which means you have to work for them for a certain amount of time (usually 1-2 years) before you get to actually keep the matching contributions that they have added to your account. If you leave before the money is vested, it is returned to the company. I was fortunate enough to work for a company that offered immediate vesting, which meant that I was able to keep and even withdraw the money they contributed on my behalf as early as I wanted. This is something you may want to know if you are not planning on staying with a company for a longer period of time.
Traditional Vs. Roth IRA accounts
IRAs (Individual Retirement Accounts) are retirement accounts that you are able to set up independently from a company that you work for. As a small business owner, an IRA was a great option for me because it allowed me to save at my own pace without being dependent on another company. Stay-at-home parents or other people who do not have an income, but would like to save, can open a Spousal IRA that a spouse who has an income may contribute to in your name.
Traditional IRAs are tax-deductible on both state and federal tax returns each year, however, if you need to make a withdrawal (often for a financial emergency or for buying a house), you will be taxed on the withdrawal.
Roth IRAs on the other hand, offer no tax breaks for contributions (meaning if you contribute, then you will be paying taxes on those contributions), yet earnings and withdrawals are usually tax free.
Depending on your tax bracket, you may want to consider the pros and cons to traditional and Roth IRAs. What is best for someone else may not be best for you. Definitely ask an expert when deciding.
Having money for retirement is well worth the process. People are living longer than ever before and unexpected events often cause some people to retire early. Having an account gives you the financial freedom to keep living your lifestyle even after you can or will no longer work. It is easy to ignore this need right now when you are young and full of optimism for the future. It is hard to put aside money that we may want to use right now. I certainly don’t believe in living extremely frugally and missing out on amazing adventures for the sake of a future that might not be waiting for us, but the idea of reaching that time in my life and not having that safety net sounds just as bad.
