I don't know about you, but retirement is something I think about multiple times a day. Don't get me wrong, after 7 weeks of funemployment, I was more than ready to sit down at a desk and use my brain again. Serving a purpose in the workforce is something I enjoy…just not something I want to do forever. As the daughter of a banker, retirement was one of the many financial topics gleefully (and sometimes aggressively) discussed over family dinners.
As a recent post-grad, retirement may not be top of your list. You probably dismiss it: it's not important yet, right? I mean, you're still in your 20's! Wrong. Even saving a few thousand dollars each year could benefit you light years. If you invest wisely, your money grows…but you knew that, right? No one really gives a shit so here's a graph to prove how right I am.
There's three main accounts available to save for retirement, two that make the most sense for the 22-30 age group. You can choose one or the other or all. Each are a bit different and have their pros and cons. There's a 401k and a Roth IRA. A Traditional IRA is also an option, but I see more benefits with a Roth. If you can afford to max out your 401k, open up an IRA…or start looking for a trophy wife.
What it is: an employer-sponsored plan that you contribute a portion of your pre-tax income to. This money is then invested and saved for you. If your employer offers any type of company match, you should absolutely have a 401k. Let's assume they do… Every company I've worked for has offered up a percentage of what I put in up to a certain maximum dollar amount. So, your company offers a 20% match up to $20,000. If you put in $200 each month, they'll put in $40. That's free money. The contribution your employer makes does not normally count towards your max. The 2016 max is $18,000 if you're under 50.
How it's taxed: Your contribution comes out of your gross salary, not net. So your money has not been taxed when it goes into this account, meaning you'll have to pay taxes as you withdraw once you reach retirement age. You'll need to remember this when you're looking at the balance of your account, it's reflected before it's taxed. You do not get any sort of tax credit/deduction when you file your annual taxes for contributing.
How it works: I had to phone a friend on this one…thanks, mom. My HR guy handed me a 40-page document that was basically in Chinese. Zita idiot proofed it for me. Basically, they gave me the option of 10 different funds and I chose one based one my age/my year of retirement. There was also a custom portfolio option and an option to split my contribution into different trades. I decided to take the easiest route and just throw my money into the most aggressive fund and be done with it. I suggest if you want to get more complicated, contact an advisor i.e. someone who has time to give a shit.
What it is: An individual retirement account that has already been taxed. This is a better option for people who are years and years away from retirement because it assumes your tax bracket is smaller now than it will be in the future. Unlike a 401k, you can early withdraw from your Roth without penalty if you are buying your first home or paying for college.
How it's taxed: When I have leftover money each month, I wire it to my Roth. Since its already been taxed, your balance accurately reflects the amount you can eventually take out of the account. My favorite part of a Roth is the deduction you can claim on your annual taxes. Again, all about the free money. You can contribute up to $5,500 annually, your deduction is calculated based on your contribution.
How it works: TD Ameritrade is my Roth administrator, Fidelity is another reputable company. This account will be free to open and most companies have an app. You can either make the trades yourself, which is the most fun but you should also research and use caution. This isn't monopoly money and it's definitely not a casino. As your Roth grows, it might be a good idea to speak with/hire an advisor about how you're managing your money.
With the end of the fiscal year quickly approaching, I urge you to open a free Roth IRA account with your IRA administrator of choice and deposit all your Christmas money. You don't need another pair of new boots, your 65-year-old self with thank you. Ask your parents to help you research a few stable stocks to trade or target funds to invest in, or let me know if you need to borrow mine? Merry Christmas, happy trading, and even happier retirement!