Unless you’re of the “greatest generation” (WWII), odds are you’re first starting to deal with retirement or planning retirement savings. This can be a headache and a half because most of us don’t have copious amounts of extra money to put away. That said, even putting away a little now, ($50 a month) will go a long way in prepping you for the big R. You have options -
IRA -Individual Retirement Account
Within the IRA plan there are four main types:
-Roth IRA: all funds are considered post-taxes and therefore do not help or hinder you when it comes to tax season. Often times this option is the best solution for young investors who may not have a lot of liquid (plain old cash) funds lying around. Depending on the structure of the Roth IRA, you might end up getting a few tax benefits despite’s it’s inherent agnostic tax structure. For example, Fidelity’s Roth IRA has a tax benefit for making the max deposit for each tax year ($5k).
-Traditional IRA: Traditional IRA’s have no max amount you can put into them, but are treated as pre-taxation, so when you withdraw the funds, you will be paying taxes on all profits. This is a good fit for more stable investors who can commit to 10-20% of their income going to retirement, and are not going to need the funds for 40+ years, as there are penalties in addition to the taxes for withdrawing early.
-SEP IRA: SEP IRA’s are very similar to traditional IRA’s, except in this version an employer may match the dollar amount you invest in your retirement up to a certain point.
- SIMPLE IRA: Same as above, except this time the employer has to match dollar amounts.
401K – Deductions from paycheck
A 401k is the most traditional form of employer assistance retirement planning. The most common structure for 401k’s is to have an account through an employer where they just take out the agreed upon amount out of the paycheck and deposit it into an account specified at the beginning of the arrangement. In some cases, the employer will match dollar amounts or for every _ dollar amount. Either way, there is a limit on how much can be deposited per year ($17K currently) and all money allocated to a 401K account is “ignored” until withdrawn. This means taxes will only apply to funds not deposited into a 401K, and to funds withdrawn from a 401K.
Stocks, Funds, and all that jazz – adding a little risk for the hope of large profit
While this can be applied to the IRA structure, almost all financial institutions have a “money management” system where you can decide how much risk and how much your comfortable investing. While a well rounded portfolio will have a little of everything, the main plays in retirement planning are usually ETFs (a grouping of stocks purchased together), and mutual funds ( a collective of investors buying into a managed portfolio of investments). ETF’s have no minimum investment other than the price of the ETF. Mutual Funds have a minimum ranging from $2K to $2500. While this route isn’t for everyone, it does allow for more growth per dollar due to the added risk. Many funds are structured to be high risk in the beginning, while growing more conservative as they reach maturity.
While there are other strategies out there, these are the cornerstones on which to begin planning. What do you find most difficult about planning for retirement?
