The time to start thinking about retirement is just before 30, maybe even earlier if you can manage it. When we’re young, we tend to believe that we are invincible. As we age, we realize how short life actually is. In the interest of helping you plan for a better retirement, we offer these explanations of common vehicles for saving and how they can benefit you.
An individual retirement account is exactly what it sounds like. IRAs are typically used by small business owners and freelancers, but some full-time employees use them too. They are most common in situations where you employer does not contribute to retirement. They allow you to stow money away for retirement that is tax-deferred up to a certain limit. This means that all money accumulated annually below this limit is money that was already taxed, and won’t be taxed later on withdrawal. This helps avoid the problem of paying twice to invest your money (once in payroll taxes and again in later life with capital gains).
Many full-time workers rely on a 401k to help plan for their future. This is because it’s easy to use one. You can have your employer pay into your account each paycheck, so you don’t get a chance to spend the money elsewhere. These plans sometimes come with employer contributions as well, which means that the employer will match what the employee puts in.
For most people, the magic retirement number is somewhere in the millions. Without making money work for you, and without paying into your retirement accounts, you won’t have a comfortable transition out of work.
This article was written by Phin Upham
About the Author: Phin Upham an investor at a family office/hedgefund, where he focuses on special situation illiquid investing. Before this position, Phin Upham was working at Morgan Stanley in the Media & Technology group. You may contact Phin on his LinkedIn page.