A few months ago I listened to this story of three millennials discussing retirement on Marketplace (the go-to radio destination for personal finance geeks).
My take-aways: They don’t have a clear picture of what retirement looks like. One of them talks about maybe eventually living in a beach house. They have a lot of places competing for their money: student loans, car payments, the vague notion that they should start saving for retirement.
What’s the biggest thing stopping them from saving for retirement? Not knowing how to start. Or where to go for information.
There is so much information out there on retirement. The most confusing part of doing your own research is the financial vocabulary you’re expected to know and master. Go slowly, read good blogs and books, and talk to people you trust (who aren’t trying to sell you anything). Below are more specific suggestions and resources on how to start.
Here’s an easy to use retirement investing flowchart from Learnvest and the article where it came from. Just be careful with the advice from articles on their site (and notice when what you’re reading is a sponsored article). The flowchart I linked is for individuals but the article also has a chart for those who are married.
- If your employer offers a retirement plan (like a 401(k), 403(b), or 457) AND offers a match — sign-up for it. Many employers have started auto-enrolling workers in a plan.
- Then contribute as much of your salary as you can to get the full match (it’s basically free money but there is usually a limit to how much they will match).
- If your employer offers a retirement plan but no match, then open and contribute to a Roth IRA (individual retirement account) and then to your employer’s plan if you have more money to invest.
- Decide on a fixed amount* every month that you can afford to put into your account(s).
- You have to decide where to invest your money once it’s in your account(s). Choose broad-market index funds and keep your fees as low as possible.
Below are the questions I get most often about retirement accounts (and my answers):
How do I open an account? Through your employer or independently. If you are opening a retirement account through work then you are limited to the companies they have agreements with. Research those companies and check out their investment options and fees. Then contact human resources and they will set you up. With a Roth IRA, you can open an account online with any company you want because it’s independent of your employer. If you make under $125K then you are eligible to open a Roth IRA (income limits may change). I am a fan of Vanguard because I’ve found that they have the lowest fees for their index funds and life cycle funds.
What is the difference between a Roth IRA and employer-sponsored plans? How your money is taxed. When you put money into an employer plan you save money on taxes now. And you are taxed once you start withdrawing after you’re retired. With a Roth IRA, you pay the normal amount of taxes on what you put in but then once you retire you don’t pay any taxes on what you withdraw. Which is better depends on your current situation (i.e. your tax bracket) and whether you think you will pay lower or higher taxes when you’re retired. Do not think too much about this. If you can’t decide, you can open an account in each type of plan and put equal amounts in both. The important thing is to start.
How much can I invest? The contribution maximums for tax-advantaged plans are set by the IRS every year. 2013, the maximum you can invest in an employer-sponsored plan like a 403(b) or 401(k) is $17,500 per year. The maximum for a ROTH IRA is $5,500 per year. I know those numbers seem huge. But don’t worry about contributing the max now — do what you can. You can always increase (or decrease) your contributions later.
How much should I invest? Determining a precise amount for how much you need for retirement is a very personal thing. Your “retirement number” depends on details of your situation, such as: what kind of lifestyle you want, if you want to work part-time, what your healthcare expenses may be, and where you plan to live. Don’t worry about an amount right now. Just invest as much as you are comfortable with right now.
Things can get a lot more complicated with these plans when you start getting into rollovers, withdrawals, recharacterizations, etc. You can read up on that stuff if it comes up later. Again, don’t worry about that now. Just start.
Remember that retirement investments are products. Products come with fees. So as always, do your research before you buy.
There are a lot of ways to save and invest. Retirement savings based on stock investing is just one piece of the puzzle. Frugality, insurance, and the strength of your community are other important pieces. The key is starting as early as you can.
- A list of personal finance vocabulary.
- jlcollinsnh’s guide to money he wrote for his daughter.