Retirement isn't going to save for itself.
"You have to actively do things to build your wealth," says The Washington Post's personal finance columnist, Michelle Singletary.
"It's not like you go get a lotto ticket and you become rich instantly. Wealth doesn't happen that way," she says.
Luckily, learning a few key basics can put you on a path to a nice retirement fund. If you're lucky enough to be working and saving extra cash during COVID-19, right now could be a really good time to get started. But no matter how COVID-19 has affected your job or finances, these are good tips to remember.
Start saving as early as you can.
If you're young, here's the secret to building a good retirement fund:
"You're young. That is your advantage. That is your secret stock," she says. The longer you have to save and invest, the more likely you are to reach your goal.
When you start investing your retirement savings early, you can take special advantage of compound interest — you're reinvesting all the interest you earn, to get interest on interest.
"I like compound interest because basically your money is earning money on your money," says Singletary.
The stock market goes up and down, but over long periods of time, it tends to give you about a 7% return on your investment each year. That means your contribution to your retirement fund grows without you doing any extra work.
Here's the real magic of compound interest: let's say in your early 20s, you scrape together a couple hundred dollars to save for your retirement out of each paycheck. By the time you turned 30, you'll have saved around $50,000.
Thanks to compound interest, if it's growing at 7% a year, that money doubles by the time you're 40 years old. It doubles again and again with each decade, so by the time you're 70 and ready to retire — there's $800,000 waiting for you. You'd probably be saving a lot along the way, too — but it's the money you start investing when you're young that has the time to really, really grow.
Once you're saving, Life Kit has an episode all about how to invest your retirement fund.
If your company offers to match your retirement contribution — take it!
Singletary says many people will get into the default retirement plan offered by their employer, which usually provides between 2% and 5% of take-home pay to invest with.
"But, that's not going to be enough," says Singletary.
It's important to do the math, figure out your retirement goal, and increase your contribution, she says. This is especially important if your company will match what you contribute to your retirement account. If the company will match up to, say, 5% of what you contribute, then you at least want to be putting in 5% of your paycheck — or you're missing out on something pretty rare in life: free money.
"That's just free money. That's just putting money on the table. So take that money off the table," says Singletary.
Don't get too hung up on types of retirement accounts — just save
Many companies have a company-sponsored plan called a 401(k). For non-profits, it's called a 403(b). Employers can often match the money that their staff contributes to these plans, so it almost always makes sense to take advantage of that.
Some plans default you into a really good set of investments based on your age. With other 401(k) plans, you have to do some homework and make sure you're investing in the lowest-cost options in the plan. Our investing episode has more about that.
Then there are Individual Retirement Accounts, or IRAs. You can set up an IRA for yourself, and invest in whatever you want. You don't have to pay taxes on the money you put into an IRA until you withdraw the money in retirement.
A variant of those, Roth IRAs, are similar — but you pay the taxes up front, before you put the money in (like any other income you pay taxes on). But then when you take the money out, you don't pay taxes. A Roth IRA might make sense for you if you're young, and think you're in a lower tax bracket now than you will be in retirement.
But Singletary says, it doesn't make too much of a difference which type of account you pick — as long as you save all you can and invest it wisely.
Set a goal
Aim to save 15% of your gross income each year for retirement, Singletary says. She knows that can be a lofty goal, though, depending on how much you make and whether, say, you're single and living with your parents, or just becoming a young parent yourself and buying your first house. Either way, start saving something.
"Maybe starting out, you can only do five percent — then the next year, see if you can push it to six....But try to reach that 15% goal as soon as you possibly can," she recommends.
If you're struggling with finances and find it difficult to save anything at all, Life Kit has episodes on paying off debt, avoiding unnecessary fees, and paying off student loans.
Make sure to review our tips about seeking financial advice so you find an advisor with your best interests in mind.
The podcast portion of this episode was produced by Meghan Keane.
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