Preparing financially for your retirement is a lifelong project. That should not make you feel intimidated, rather it should make you realize that you have some time to figure things out. But there are certain goals that you should hit as early as possible. There really is never too early to start considering your retirement.
The earlier you start investing in your retirement, the more money you will end up with when you do retire. This is because your retirement fund will utilize compound interest, which means that it will accrue interest from not only your principal but also from the interest you previously gained. That means that the earlier you start investing, the more you will accrue in interest over time. You also want to start investing as early as possible because even if you cannot invest a lot of money, it will give you more time to put away more of your smaller payments. It will also give you time to pay off student loans or small business loans.
Create an Emergency Fund
Typically a financial advisor will recommend that you start and fund an emergency savings account before you start focusing on your retirement. This is because if anything unexpected happens like an injury or car failure, then you can continue funding your retirement fund while simultaneously handling the emergency. You should also never take any money from your retirement fund because there are penalties for withdrawing money early. This money is intended for your retirement so there are rules about when you can withdraw any funds. The age at which you can withdraw from your retirement funds is 59 1/2.
Remember Health Insurance
When deciding how much money you want to save for your retirement, keep in mind that you will have to rely on Medicaid and statistically, many on Medicaid need additional insurance. This insurance will need to be paid for by your retirement fund, social security, or from the part-time job that those collecting social security are allowed to have.
To initially understand how much money you will need to invest monthly until you are at the age of retirement, determine how much money you will need. Once you do, utilize one of the many retirement calculators that you can find online. You can then see how compound interest will affect the situation and what would happen if you invested more each month.
Utilize Your Employer’s Retirement Plan
Many employers offer a 401k or something similar depending on your profession. Make use of this plan by investing a portion of your paycheck every month. The fantastic thing about investing money into your 401k is that this is pretax money. Meaning that you actually save money from taxes when you invest your pre tax funds. Granted, you will have to pay taxes when you withdraw money from your 401k, but you can make more in the long run. Companies can also offer a match program. This means that they will match your investment up to a certain amount, which is essentially free money. Your employer will also have resources to help you decide how you would like your retirement fund invested.
Look Into an IRA
An IRA is another kind of retirement fund that is post-tax. That means that you will not have to pay taxes when you withdraw your money at the time of retirement. IRA stands for Individual Retirement Account. There are several different kinds of IRAs such as a Traditional, a Roth, and a Self-Employed. Depending on your income, you can get a tax break for investing in your IRA when you file yearly. Deciding how to invest your IRA is up to you. The easiest option is to choose a target-based fund. This is a selection of stocks and bonds that varies as it gets closer to your target date of when you want to retire. Typically it will invest in riskier ventures when you are younger and then invest in safer options, like bonds, as you get closer to your target retirement date.