I am guessing that if you have been following my blog chances are you may have read that it is imperative that someone save for their retirement. And the key for someone who is younger is to save early and save often. In an earlier blog we looked at Generation Y workers as they compared to some other generations and it was revealed that on a whole they are doing a pretty good job. But someone in their 20’s may be asking themselves why it is so important to start saving now. Also as discussed in another blog someone who is 25 and saves for 42 years until their retirement age will have about $1.2 million as compared to the same person who waits until they are 35 to start savings, they will only have about $600,000 in savings. Remember to always pay yourself first.
Depending on what kind of plan you are saving in, a 401(k) or an IRA can have some effect on your current taxes. Some employers offer traditional 401(k) plans that will reduce ones taxable income in the year in which the contribution is made. The same holds true for a contribution to a traditional IRA. In both of these scenarios you are given a tax advantage today and your money will grow tax deferred and will be taxed as ordinary income when you retire.
I would seriously consider contributing to a ROTH 401(k) if your employer offers one and a ROTH IRA. While you will not get the tax advantages in the year you make the contributions all of the earnings that have accumulated tax deferred are withdrawn tax free upon retirement. Consider this when making this decision. As you are younger and are not in your prime wage earning years your tax bracket is relatively low now negating the advantages of getting the tax deduction now. I think that paying the taxes now and letting the money grow tax free for 40 plus years is far more advantageous to the minimal tax advantages a younger worker can experience today. That and I do not see a realistic future where tax rates will be reduced although they in theory should be lower in our retirement years. But even if you go back to your tax bracket that you were in when you first started working using the example from above a ROTH account would save you taxes on the entire accumulated amount.
How do you start to save in the first place you are asking? Well the answer to that has been discussed many times in various blogs and that is to budget yourself. How can you save when you do not know where you money is going in the first place. Under the Financial Tools Tab on this blog’s homepage you can find links to two well-prepared spreadsheets that can assist you in ways you cannot imagine.
When you are in doubt you need to know that it is okay to ask for help. When you are first starting your careers it is wise to ask for advice on 401(k) plans or how to invest what you are saving. Many private employers will offer financial services for employees to assist them in these matters. And in the event yours does not take full advantage of what the Internet has to offer or find a financial planner who will assist you for a flat fee. The latter will be difficult to find but there is no harm in asking or looking. Also it is always important that you understand what it is you are investing in. If you do not understand the investment do not invest in it no matter how good it looks. It is difficult enough to manage a portfolio of securities you understand but how in the world can you expect yourself to manage something you do not understand? There are numerous websites that for a small fee will actively manage your funds mainly through the use of exchange traded funds. I will be examining these services in an eBooklet that I hope to release in the next few months.
No matter how much you save it is imperative that you always save in your company’s 401(k) plan up to the amount that they will match. Never leave free money on the table as that is an instant gain on your investment. Another thing that is a good idea is when you receive a raise or increase in your salary it is also a good idea to raise the amount you are contributing to the 401(k) plan. Also it is wise to look at your retirement accounts on a regular basis to ensure that they are preforming as you want them to. Unless you have invested in target date funds you may have to evaluate your asset allocation. From time to time you will have to change things and reallocate assets. But do not confuse this activity with trying to time the markets which you should never do.
Starting early and saving as much as you can is the key to anyone’s retirement but for someone who is still in their 20’s this can provide tremendous opportunities. Like to the tune of an extra $600,000 in a single account. Don’t believe me try the math yourself.
