Once you’ve gotten your dream job and settled into it, it’s time to think of how to plan a comfortable retirement. Many employers offer some sort of pension plan but many don’t: do you know how to set up your own?
Tax-Deferred Retirement Account
As soon as you can, open a tax-deferred retirement account—like a Roth IRA or Roth (401)k—so you can start saving money that doesn’t get taxed until you withdraw it. This shouldn’t be your only option rather one of several; by putting some money into a tax-deferred retirement account, you’re letting it grow and grow instead of getting taxed and having a smaller amount grow. As well, this kind of account—when money is withdrawn from investments made with it—is taxed (at a lower rate) when you’re typically retired (i.e. pulling in little or no income.)
The world of investing is a needlessly complicated one, and can be broken into three different classes: lending, cash equivalents, and ownership.
This is the most commonly known type of investing, and includes putting money in stocks, businesses, real estate, and valuable objects. It’s a volatile area because it’s based on expected appreciation, but if planned well, the rewards can reflect the risk and tumult.
There’s a crude saying out there that power isn’t defined by how much money you have, but by how much you’re owed. Allotting some of your retirement money to lending investments offers security at a lower risk than owning the investment outright. Under this category, there are two different ways to approach it: your own savings account—lending money to your bank to invest instead of you doing it—and bonds, which cover everything to international debt issues to Treasuries.
The return tends to be pretty small in money market funds, but that also means the risk is pretty low, too. However, the biggest appeal of cash equivalents is you can access the investment easily and conveniently, turning it into cash as quickly as writing a check.
How Much Should be Saved?
It’s easier to work backward when calculating this amount, with a good general rule being a nest egg of 10 times your annual pay. But if you can’t manage that on a yearly basis, then remember that putting away any money is better than none at all, and the earlier you start the better.
Generally, though, efficient savers and investors put away about 10% of their income away each year, and maintain that each time they get a raise.
Index funds are a really smart way to go, as you’re putting money where seasoned experts have shown steady growth. It doesn’t always return a great deal of money, but it’s a safe, smart bet that’ll accrue money over the long-term. They’ve also gotten good press in contrast to employer-handled retirement plans because of their better growth and return.
Some people like to hand over the reins to financial professionals because they’re familiar with the ins and outs and do it for a living, while others try and minimize the fees associated with it and do the work themselves. Investing and retirement planning isn’t rocket science, it just takes a bit of research and being on top of information.
Retirement planning and pension plans don’t work the same way they did in the ‘50s when it was easy and comfortable, but with a bit of work, you can have a nest egg that’s just as good.