At some point, we all want to retire comfortably.
To make sure you can do it with comfort, there are three key accounts you should open, according to finance coach Suze Orman.
Key Points About This Article
- Even if you’re still in your 20s, it’s important to put aside some money. So that when you get to retirement age, you don’t have to worry about where money will come from.
- At 20, 30, even 40-years-old, consider setting up IRAs, Roth IRAs, and a 401(k).
- Someone who starts saving 15% of their income by age 25 and keeps at it, will be in good shape decades from now.
- Your future is too important to leave to chance. See if you’re on track for retirement by taking this simple quiz and matching with a fiduciary financial advisor serving your area. It only takes a moment, and is totally free. Click here to begin. (sponsor)
Even if you’re still in your 20s, it’s important to put aside some money. So that when you get to retirement age, you don’t have to worry about where money will come from.
Focus on Setting up Retirement Accounts
At 20, 30, even 40-years-old, consider setting up IRAs, Roth IRAs, and a 401(k).
Start saving for retirement as early as possible. That way you can take full advantage of compound interest. Unfortunately, the longer you wait to get serious about saving and retirement, you begin to lose out on the power of compound interest.
As noted by Fortune.com, “Let’s say you had $5,000 in a savings account that earns 5% in annual interest. In year one, you’d earn $250, giving you a new balance of $5,250. In year two, you would earn 5% or $262.50 on the larger balance of $5,250, giving you a new balance of $5,512.50.”
“Thanks to the magic of compound interest, the growth of your savings account balance would accelerate over time as you earn interest on increasingly larger balances. If you left the initial principal of $5,000 in the savings account for 30 years, earning a 5% annual interest rate the whole time and never adding another penny, you’d end up with a balance of $21,609.71.”
Unfortunately, a lot of younger people would rather have fun with their money than save it.
I can start saving another time, they say.
According to Orman, “Someone who starts saving 15% of their income by age 25 and keeps at it, will be in good shape decades from now.”
Establish an Emergency Fund
No one can plan for an emergency. It just happens – usually at the worst time.
Unfortunately, millions of Americans have nothing saved for an emergency. In fact, according to a U.S. News survey, 42% of Americans do not have an emergency fund. Additionally, two in five (40%) wouldn’t be able to cover a surprise $1,000 expense right now using cash or savings.
That’s pitiful.
Financial pundits argue you should have money in a savings account earmarked for emergencies. That way, if you lose your job, worst case scenario, you’ll have access to money to cover your expenses.
Those pundits also argue that you should have at least three to six months of expenses saved at any time. However, as Suze Orman learned in the wake of the pandemic, you should have at least eight months of expenses saved to comfortably get by.
In addition, according to Orman, you should put your emergency savings in a high-yield account. This way, your money makes you more money with interest.
Set up Investments with Your Financial Advisor
Diversification is also vital for minimizing risk and maximizing returns over the long haul. Orman suggests using a mix of stocks, bonds, and other investment tools, such as real estate. She also argues it’s important to review and adjust your diversified portfolio, especially as you get closer to retiring. This is another reason to consult with a financial advisor.
And, if you already have investments, review them regularly with your financial advisor to make sure you’re still on track with your financial goals.
Max Out Your Retirement Contributions Today
An Individual Retirement Account (IRA) allows you to save for retirement with tax-free growth or on a tax-deferred basis. You can invest in a traditional IRA, for example. While it’s best to check with your financial advisor, many times you can deduct contributions on your tax return.
There’s also the Roth IRA, where you make contributions with money you’ve already paid taxes on. With a Roth IRA, your money can grow tax-free with tax-free withdrawals. But again, check in with your financial advisor before doing anything. Or, if you’re self-employed, look into the Solo 401(k), a variation of the 401(k) plan but specifically set up for those who work for themselves.
The image featured at the top of this post is ©Sutthiphong Chandaeng / Shutterstock.com.