This week's challenge is to start OR review your investments for retirement!
This is challenge 3 of 4 in the investing series.
Note: If you are outside of the U.S. be sure to research the equivalents in your country for the tools/suggestions mentioned throughout this investing series.
So let's get into it - there are two avenues in which you can save for retirement:
1. Your employer retirement savings plan (For people with an employer)
This type of retirement savings plan is specific to people who work for an employer. If you are self employed or own a business then this is not an option for you so skip to the next section below.
If your employer offers a retirement plan it's a good idea to take advantage of it (although investment options might be very limited). In the US most common retirement savings options offered by employers are the 401(k), 403(b), 457(b), IRA. In addition many employers will offer a match which is essential free money, up to a certain percentage of your contribution.
2. Your self created retirement savings
This type of retirement savings plan is a saving plan that you can set up independent of any employer e.g. an IRA. If you are self employed or a business owner you are eligible for this type of retirement savings account. (Click HERE to learn more about the different retirement accounts in the US specific to business owners)
If you are employed by a company / organization etc, you can set up this type of retirement savings in addition to your employers plan.
Pre-tax vs. post-tax contributions
When it comes to pre-tax contributions, the contributions you make to your 401(k), 403(b), 457(b) and traditional IRA are made before your income is taxed, which means that a larger amount of money is working for you in the stock market (your contributions plus the taxes are all invested) compared to when you contribute post tax (If you are outside the US pls confirm this).
However when you reach retirement, you will be required to pay income tax on your withdrawals. In my opinion though, the growth of pre-tax contributions, especially over time ,will most likely far out weigh any taxes you incur come retirement.
When it comes to post tax contributions, (in the US this is specifically in a ROTH IRA), since you'll be contributing after taxes, a smaller amount of money is working for you (depending on your tax rate, it could be 25% to 40% less money), the pro is that come retirement, if tax rates are higher, then you won't have to worry about taxes on your contributions.
One important thing to keep in mind is that ROTH IRA (and traditional IRA) contribution limits are MUCH LOWER (~$12,000 lower) than the 401(k), 403(b), 457(b) etc. So the total amount you can save in an IRA is very limited. My recommendation is that if you qualify to do both. You can set a goal to max out your 401k and max out your ROTH. The end result is more money for you at retirement regardless of taxes.
Important note on taxes
Retirement lasts upwards of 20 plus years which means when you retire you are not instantly withdrawing all your money in one go to be taxed.
Your money will still have more time to grow (conservatively) AND many people should be spending less in retirement compared to the years prior to retirement because their kids are out of school and hopefully independent, their mortgage should be paid off etc - all part of having a good financial plan - and so your taxable withdrawals are more likely to be at a lower tax bracket.
Ok now all that is out of the way, your challenge this week is to use the downloadable checklist on this page to work on starting or reviewing your investments for retirement.
Be sure to review the checklist as it contains additional details on investing for retirement.
One more investing challenge to go! But we'll be taking a breather from investing next week as I realize you might need time to complete your action items thus far in the investing series.
P.S. Don't forget to share your progress in the Facebook group!
Important to note
It's important to understand that your investments in the stock market are not guaranteed and neither are they insured, as a result, investing in the stock market means you are assuming risk. However, if you have the right objectives and a proper investment plan based on those objectives you should be just fine.
To learn more be sure to check out the investing section on the Clever Girl Finance blog HERE.
I also recommend a great book on investing for beginners called "A Beginner's Guide to Investing: How to Grow Your Money the Smart and Easy Way" by Alex Frey HERE.
And finally be sure to reach out to a financial advisor if you have specific investing questions.
It's week 16 of The 26 week savings challenge!
This week, your savings deposit amount is $63.00
(If you've been consistent with your deposits, this week's deposit will bring your balance to $528!)
- Make your transfer.
- Check off this week's amount on your savings challenge schedule.
- Share your progress in the Facebook group!
Note: This challenge will be on-going throughout this accountability program in addition to your other weekly challenges.