“Retirement? WTF Amanda? I’m in my GD twenties! Shouldn’t old people be worrying about that?”
Well, yes they should. Actually, everybody should be worried about it, ESPECIALLY US.
I’m sure you are all already aware of the financial hurdles that face our generation. Mounting debt of our own, paying back the debt of the generation before us, weak economy, employer’s cutting back on benefits, Social Security is not looking too good…wait, what were the last two?
1. Employers cutting back on benefits.
This may even include how much your employer matches your 401k contributions. If they don’t have money, they can’t give it to you. Simple.
On a related note, if you were considering a government job for a nice pension once retirement comes around, many states (including my own) are making several modifications to this because they are in debt. Basically, you’re going to have to save for your own retirement anyway
(This does not mean stop contributing to your 401k now. By all means, if you are getting free money from your employer MAX THAT SHIT OUT ASAP)
2. Social Security is looking bleak.
You know that check grandma gets every month? We’re paying for that with our taxes…and we’re paying A LOT. However, it still doesn’t seem like enough as there are constant news reports that Social Security is a) poorly run and b) going to run out before we hit retirement.
And so, with so many financial IFs in the air, why risk it?
Yesterday, I accomplished one of my financial and yearly goals for 2011: I opened up an Individual Retirement Account (IRA). Similar to a brokerage account, this deals with investments (usually mutual funds) that grow overtime. The catch is that I can’t take the money out until I’m 59 1/2.
This has in advantages in several ways. First, my employer at the moment does not offer a 401k plan. Even if they did, I would only be able to invest in the funds my employer chooses. With an IRA I have much more control and I can have it through the years with no change if I change jobs.
(Again, if you employer offers a 401k plan MAX IT OUT. Still wouldn’t hurt to have an IRA on the side though.)
Second, I am 22 years old, if I start saving and investing now can you even imagine how much I would have for retirement by 59 1/2?
Third, since there are major penalties for taking the money out before you are supposed to (unless something like death is looming) it makes sure that you actually save money for your retirement.
And finally, if something were to happen to me, as my beneficiary my brother gets whatever money I have earned through the IRA.
IRA Basics
Before you run off to open an account right away, there are a couple of things you should now. Mostly, that there are two kinds of IRAs that differ in terms of taxes. (Don’t worry this isn’t very confusing).
Traditional IRA
This is probably what your parents started with.
A Traditional IRA just means that taxes are taken out when you take the money out in your golden years. Although it may seem brilliant because you would be in a lower tax bracket at that point, if you have a nice lump some of cash in your account Uncle Sam doesn’t really care what tax bracket you are in. Besides, we never know how taxes are going to be 30+ years from now.
Lawmakers and financial experts realized this and thus the Roth IRA was born.
Roth IRA
Taxes are taken out now so you don’t have to worry about them later. This is the winner by far, especially since when you are starting out you won’t have that much for Uncle Sam to take anyway.
How and Where to Open and IRA
Usually, there is a minimum amount to open an IRA, at least $1000 depending on where you open it. You can either pay it all at once (that’s what I did just so I would have to make another set of automatic bank transfers) or, if it is allowed, you can pay it in increments as low as $50 a month.
I have read several books on the topic (giveaways coming soon) and the winners seem to be the following.
1. Vanguard: The minimum to open an IRA with Vanguard is $3,000. They don’t wave the fee, however they do have really great low-cost funds.
2. T. Rowe Price: This is where I opened my account because I have read about it in some many financial books. The minimum to open an account is $1000, however you can pay in monthly installments of $50. They too offer really great low-cost funds and have several funds specifically designed by your age and when you would be retiring.
3. Schwab: The minimum for Schwab is also $1000 but it can be waved by monthly installments of $100. If you open up a checking account with Schwab you can link it to your IRA for easy automatic investing.
Now that two of my big financial goals are taken care of and under control (and it’s only March!), I can get to the fun stuff. Like saving up for two weddings I am attending in beautiful California later this year.
Keep a Lookout for GMW Book Giveaways!
Since I have encountered so many great books along this journey I will soon start hosting GIVEAWAYS! That means that several of you lucky readers are going to end up with fabulous books concerning post-grad life, finances, and running your own freelance business.
These books have really helped me start getting things together in my post grad life and I would love to share the wealth with you all. So beginning March 28 I will host the first giveaway, Jenny Blake’s Life After College: The Complete Guide to Getting What You Want, in celebration of her book debut.
From there I will being giving away the following books:
The Money Book for the Young, Fabulous, and Broke by Suze Orman
I Will Teach You To Be Rich by Ramit Sethi
The Money Book for Freelancers, Part-Timers, and the Self-Employed by Joseph D’Agnese and Denise Kiernan
…and many more!
Great, great post! Super informative!
I’ve got a Roth IRA with Vanguard. Just so you know, Vanguard does have one fund (STAR Fund) that can be bought into for an IRA for $1000. It’s how I got started, and I’ve been able to work my way up since. It’s not as aggressive as the Target Retirement funds, but you can just switch over once you’ve built your balance up to $3000.