Retirement? Are you crazy? I just graduated college! I haven’t even started paying back my student loans yet, let alone thought about what I’ll be doing for money when I reach my golden years.
I’m not the only one. Many 20-somethings put the idea of retirement far out of their minds. It can be overwhelming thinking that far in the future, and it doesn’t help that the terminology is super confusing. Why so many acronyms?
Though it may be scary to think about, saving for retirement, and saving early, is important. According to the Wall Street Journal, "If you save $10 a day at age 25, you'll have more than $1 million by age 65, assuming an 8% annual rate of return. If you start at age 35, you'll have $445,000. At age 45, you'll only have $180,000." I don't know about you, but I'd rather have $1 million.
With the help of the Living Young & Free Field Guide and other trusty Internet sources, I’ve been able to eliminate some of the confusion surrounding retirement planning. I’ve found that it’s better to start small, like understanding key terms and broad topics, before diving into specifics. Understanding these three major terms will help when I need to discuss retirement with a financial planner.
IRA stands for individual retirement account. With an IRA, you can save for retirement separately from your standard savings account. In a traditional IRA, tax on the contributions is deferred until retirement. You can access the contributions you make before distributions begin at age 70 ½ without a penalty, but you do not have access to the interest earned without facing a penalty.
Like a traditional IRA, you can save for retirement in a Roth IRA, but this account differs in taxes, access and distributions. Contributions to a Roth IRA are after tax, so you won’t pay taxes at retirement. You can access the funds tax and penalty free if the account has been open for 5 years and if you meet certain requirements. The funds in the account will continue to grow until you want to begin distributions.
A 401(k) is another way to save for retirement, but this is not an account you can open at your credit union. Instead, it’s a plan with your employer that allows you to save a portion of your paycheck and earn tax-deferred interest on it. You employer may also contribute to the account and sometimes they’ll even match your contributions. You can think of these matches as free money, because for every dollar you save, your employer gives you one as well. If you want to withdraw from this account early, you’ll pay taxes and a penalty.
What questions do you have about saving for retirement? I’ll dig in and answer any questions you have about retirement planning in an upcoming video.