As a young adult, you may be more concerned with only making enough money to pay the bills. College students and graduates may find themselves in a position where there is only enough money for the bare essentials. A small contribution can be as little as a cup of coffee a day. This $15 a week can turn into $780 in one year. This $780 can turn into $23,400 in 30 years. This amount is the most basic calculation that does not factor in market conditions, interest, dividends, and other factors that affect the growth of your retirement account.
Sadly, a large number of the U.S. population have close to nothing save for retirement.
According to a CNBC article by Emmie Martin:
There’s no better time to start saving than now. If you are looking to generate long-term wealth, retirement savings play an important role. There are a lot of tools offered to help you prepare for life after decades of the work grind. Whether you are earning very little or you have a very lucrative salary, it is still smart to save for retirement. You may not see the benefits today, but it will be well worth it in the end.
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IRA (Individual Retirement Account)
IRAs are great for those that have some extra income to spare. In many cases, you can invest as little as you want. Some IRAs require an initial contribution of $50 but allow you to contribute less going forward. This option is great if you can only afford to contribute $10 or $20 a week.
Traditional IRA
The amount that you contribute to the Traditional IRA isn’t taxed until you withdraw it. The rationale behind this account is that you believe you’ll be in a smaller tax bracket once you retire from and start withdrawing. Many employees use this plan if they don’t have access to an employer-based plan.
Roth IRA
The amount that you contribute to a Roth IRA is taxed before you invest it. This account is best for those people that believe they will be in a higher tax bracket in retirement.
Both accounts have a max contribution of $6,000 annually if you’re under 50 years old.
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Employer-based Plans
Many employers offer employees various retirement based options. These are amazing tools that every employee should take advantage of if possible.
Pension
If you are fortunate enough to find yourself in a position that offers a pension, the employer handles the contributing for you. The company contributes money to a pension fund that grows over time. As employees retire, they receive fixed payments from this pool of funds for the timeframe laid out in the pension contract.
401(K)
The 401(K) is the most common retirement plan that employers offer. If you work for a large company like Amazon, General Motors, or Chevron, chances are you’ll get offered a 401(K). Some companies match employee contributions up to a specific dollar amount or percentage of their choosing. It is always a good idea to match the maximum that your employer is willing to contribute. If you have your 401(K) contributions taken out pre-tax, you’ll be taxed on your retirement based income once you start to withdraw. The max that you can contribute annually is $19,500.
The federal government, small businesses, and non-profits have very similar plans.
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There are many more options available, but these are the most basic ones that every young adult should be aware of and participating in if possible. Starting a retirement fund isn’t as scary as it seems. Most investing platforms have a very simple process for creating an IRA.
*IRAs and most 401(K)s are tied to the stock market, so it carries some risk. If you do decide to invest, do your research, and invest wisely.
This post is geared towards those young adults that are living in the United States. These are U.S. based options, but other countries offered similar options to its citizens.
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Previously published on “Change Becomes You”, a Medium publication.
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Photo credit: Chris Liverani on Unsplash