If you’re young, retirement feels ages away. You may not have even entered your career yet, why would you start to think about retiring?
As you get older, retirement slowly becomes more relevant – along with other priorities in life, such as buying a house, paying off student loans, or saving up to have children. As these seemingly more pressing financial obligations crop up, it’s easy to push thinking about retirement aside.
The reality is, there is never a bad time to start thinking about your retirement. You can begin to contribute to your retirement funds as early as you start working and earning a wage. This isn’t limited to full-time work, either – you can start actively contributing to your retirement before you even turn 18.
By starting early in your life, you can ensure maximum retirement benefits for longer. This is due to the nature of compounding interest retirement plans offer. The longer your money sits in a retirement fund, the longer you’ll earn over time. Your earnings will build on themselves each year, growing exponentially due to compounding interest. Depending on your fund’s interest rates, you can expect to earn significant year-over-year savings simply by letting your money sit (and not touching it for anything)!
If you’re well past 18, though, do not fear – you can still get ahead of your retirement plans and put some serious thought and effort into contributing.
Getting Started
Once you’ve decided you want to start thinking seriously about your retirement, you will want to review the options available to you for opening up a retirement fund. Depending on your age and your employer, there are a number of options available to you. To begin contributing to your retirement, most often you have the option to open a type of Individual Retirement Account (IRA), or a 401(k).
To decide which type of plan is best for you, you’ll also want to think about what your ideal retirement looks like. To do this, you want to decide around what age you would like to retire, what you want your everyday life to look like, and how much money you are expecting to have yearly during your retirement period. Are you planning on retiring in a different state? Do you want to travel a lot during your retirement? These are some of the questions you may want to ask yourself when painting a picture of what your retirement will look like.
This can feel overwhelming at first, especially if retirement is a long way away. The good news is, you can change your retirement plan as you get older – just as your goals change throughout your life, it is likely your retirement plans will change too. That being said, it’s still a great idea to have an idea of how much money you need to feel comfortable retiring.
Your Retirement Choices
Once you’ve determined what you’re looking for in your retirement period, you can begin to look into the details of your retirement fund options.
Individual Retirement Accounts (IRAs)
There are a few kinds of IRAs you can open to contribute to your retirement fund. Most notable are the traditional IRAs and Roth IRAs. You can contribute up to $6,000 a year to either of these IRAs and up to $7,000 if you are over 50 years old. Traditional IRAs are tax-deductible, while Roth IRAs are not. You can open an IRA before you turn 18 (with a parent or guardian’s help) as long as you are working and earning taxable wages.
401(k)
A 401(k) is offered by employers to their employees as a structured payment plan. There are two types of 401(k) plans – traditional and Roth. Through a 401(k) plan, you are eligible to make contributions of up to $19,500 as of 2020, and $26,000 if you are above the age of 50. Typically, employers offer to either match your contributions or contribute a percentage of your investments – totaling to a combined maximum investment of $58,000, or $64,500 if you are above 50.
Pension
Separate from a 401(k), a pension is also offered by your employer. You are typically eligible for a pension after you have worked for a certain amount of time with your employer. From there, your employer will be the sole contributor to your pension. Though a great way to earn during retirement, a pension is not particularly common.
Planning Your Contributions
Once you’ve identified which plan (or plans) might be best for you, you can next decide how much you’d like to contribute to your retirement fund. Again, you’ll want to recall your tentative retirement plans to decide how much you’ll need.
While you can contribute large amounts to your IRAs and 401(k) plans, you’ll want to ensure you are comfortable with your ongoing contributions. Try to aim for 10-15% of your income, but if that isn’t possible at first, any contribution is better than nothing.
Try to incorporate contributing to your retirement fund as an ongoing process as soon as you can. By doing this early and consistently, you’ll be more likely to contribute more over time and maximize your retirement funds for the future.
Don’t let kickstarting your retirement investments pass you by – the early you start to think about and plan your retirement, the better off you’ll be.
