Planning and investing for your retirement doesn’t have complicated or difficult. While you should definitely have some overall plan with your money, getting paralyzed by all the options and choices you have can make unproductive and leave you financially vulnerable.
When you’re just starting to look around for which account to invest in, start with your job. My husband’s job offers a 401(k) with a match and we try to take advantage of it. Try to at least set aside enough money to receive the company match as it’s basically free money in your pocket.
Depending on your employer, you’ll have different funds to invest in. If available consider putting your contributions towards low cost index funds. My husband doesn’t have this option, but he has found funds that have lower expenses and track different sectors to diversify his portfolio.
My advice is to increase the amount as you receive raises and promotions through work. It doesn’t have to be significant, just take it up a notch every increase. Besides allowing you to invest more, you’re also lowering your taxable income, a double bonus.
By the way, if your company an Employee Stock Purchase Program, you may want to consider participating. ESSP allows you to have some of your paycheck deducted to buy your company’s shares at a discount from its market price. Just remember to be diversified with your retirement fund and not too heavily invested in your company.
Open Up an IRA and Take Advantage of the Benefits
Once you’ve set yourself up to get teh full company match, you may want to look at contributing to your IRA (traditional or Roth). The main difference between the two IRAs has to do with when you’ll be taxed:
- Roth IRA – contributions are made with after-tax assets, all transactions within the IRA have no tax impact, and withdrawals are usually tax-free.
- Traditional IRA – contributions are often tax-deductible (often simplified as “money is deposited before tax” or “contributions are made with pre-tax assets”), all transactions and earnings within the IRA have no tax impact, and withdrawals at retirement are taxed as income.
Banks, brokerages, and credit unions offer IRAs. Some charge a flat fee for the year, some take a fee for each transaction made, others can take a percentage, and some do all of this. Compare your options to see if you’re getting a good deal.
Thoughts on Automating Retirement Contributions
For those who are investing automatically, what percentage of your income to do set aside every month? Where do you do invest (employer’s 401(k), brokerage, local bank) your money?
Note: This post was included in the Carnival of Personal Finance.