This is the first in my “Graduate’s Guide to Being a Grownup” series. I’m hoping to give some introductions as well as in-depth information to help newly minted graduates (and really, anyone who has questions) .
As a reminder/disclosure, I am NOT a financial advisor. Nor am I an investing expert. I’m just someone who has been there, done that, and (thinks I) know what I’m doing.
Retirement Plans. They’re a big topic. A confusing, frustrating, and sometimes depressing topic.
The basic idea is this: You work for a while. Then eventually you retire. You want enough money to keep you going until you, erm, don’t need money anymore. So you need to put money away now for WAY in the future, but you don’t really know how much, since expenses and prices will be different when you’re older, and you don’t know how long you’ll need money for.
See, I told you it’s a tough topic.
But here’s what you need to know about retirement plans.
Most of the ones that you get on your own or through work are ways to put away money now so that you’ll have money later. The main benefit of most of these accounts (over a basic savings or investment account) relates to taxes. Either you contribute money to your accounts with dollars that haven’t been taxed yet (like Traditional IRAs and 401(k)s) and then get taxed on the money you take out later, or you contribute money that has already been taxed (like Roth IRAs and Roth 401(k)s) and then get to take your money out tax-free when you retire. For both of these, that means that you’re not paying taxes on the gains in your account EVERY YEAR at tax time.
Some additional benefits can include contributions to your account from your employer (often correlated to how much you contribute).
There are usually quite a few options for what to put into these accounts. They might be mutual funds, individual stocks, bonds, or even just cash savings. Basically, you’re saving and investing within an account, just as you would with regular saving and investing accounts.
There is a limit to how much you can contribute per year to different kinds of accounts. There are income-related limits for some of the IRAs. And there are maximums allowed for many accounts, though there are catch-up amounts allowed if you’re closer to retirement age (over 50 years old).
Most of these accounts will not let you take out the money until you’ve hit retirement age. If you do, you may be required to pay penalties or additional taxes. It’s NOT recommended in most cases to take the money out, though there are some exceptions (depending on account, the reason you are withdrawing)
I’ll go into more detail about the different retirement plans available (in the U.S.) in future posts. This is just to get you started thinking about saving for your retirement.
Retirement plans are accounts you save and invest money in.
A main benefit over regular savings accounts or investment accounts is that you can save on taxes either when you contribute or when you withdraw your money (after you retire).
There are some limits to how much you can contribute each year. There are maximum contribution limits as well as (in some cases) income limits.
The earlier you start saving, the (likely) better off you’ll be, thanks to compounding interest, or gains on top of reinvested gains.
Your balance can go up or down. If you’re invested in pretty much any stock, bond, or other tradeable asset, there is risk involved.
This money is meant for your retirement, so there are penalties associated with early withdrawal.
Okay, how’s this so far? What questions do you have (about retirement or any other post-graduate topics)? Did I cover everything? Miss something? Let me know what you’d like to see in the next Graduate’s Guide to Being a Grownup!