Saving for retirement early is important because it allows your money to grow over a longer period of time through the power of compound interest. The earlier you start saving, the more time your money has to grow and the less you will need to save overall. Also, starting to save early can help you establish good savings habits that will serve you well throughout your life. Additionally, starting early can help you to take advantage of employer matching contributions, if available, and help you to achieve your retirement goals.
Types of Retirement Accounts Available for The Young
There are several types of retirement accounts that are available for young people, including:
401(k) or 403(b) plans: These are employer-sponsored plans that allow you to contribute pre-tax dollars to a retirement account. Many employers offer matching contributions, which can be a great way to grow your savings.
Traditional IRA: An individual retirement account that allows you to contribute pre-tax dollars and the growth on the account is tax-deferred until withdrawal.
Roth IRA: Similar to a traditional IRA, but contributions are made with after-tax dollars and the growth on the account is tax-free at withdrawal
SEP IRA: It is designed for self-employed individuals and small business owners.
Simple IRA: It is designed for small businesses with fewer than 100 employees.
Each of these accounts has different contribution limits and eligibility requirements, so it’s important to do your research and choose the one that best suits your needs.
It’s important to note that if you are under 18, you may not be able to open an account in your name alone, but you can open an account with a custodian who will hold the account for you until you are of legal age.
How to Start a Retirement Account
Here are some steps to help you start a retirement account:
Research the different types of retirement accounts available to you, such as 401(k) plans, traditional IRAs, Roth IRAs, SEP IRAs, and Simple IRAs. Determine which account is best for your specific needs and goals.
Gather the necessary information, such as your Social Security number, employment information, and bank account information.
Open an account with a financial institution or brokerage firm that offers the type of retirement account you have chosen. This can typically be done online or in person.
Make an initial deposit into your new account. Some accounts may have a minimum deposit requirement, so be sure to check the account’s terms and conditions.
Set up automatic contributions to your account, if possible. This will help you save consistently and make it easier to reach your retirement goals.
Review your account regularly and make changes or adjustments as needed.
Seek for professional advice if needed, especially if you have a complex financial situation or you are not sure about which retirement account is the most suitable for you.
Remember that starting early and consistent saving is key to reaching your retirement goals, and it’s never too early to start planning for your future.
Simple Example of a Retirement Account in Numbers
Here is an example of how a retirement account might grow over time:
Let’s say you are 25 years old and you decide to open a Roth IRA with an initial deposit of $1,000. You then contribute $500 per month to the account. Your investments in the account earn an average annual return of 7%.
By the time you reach age 65, your account would be worth approximately $1,095,532.
Here’s the breakdown of how your account would grow over time:
At age 25: $1,000 (initial deposit)
At age 30: $47,500 (5 years of contributions at $500 per month)
At age 40: $198,824 (10 years of contributions at $500 per month)
At age 50: $474,907 (20 years of contributions at $500 per month)
At age 60: $938,766 (30 years of contributions at $500 per month)
At age 65: $1,095,532 (35 years of contributions at $500 per month)
Keep in mind, this is an example of how an account might grow and actual performance will depend on a variety of factors including investment choices and returns, contributions, and fees.
It’s important to remember that this is an example, and the actual growth of a retirement account will vary based on factors such as the contributions, fees, and investment returns. Additionally, this example doesn’t consider any potential employer match, which could have a significant impact on the overall growth of the account.
