INVESTINGBUDGETING

Navigating Your First Retirement Plan

Entering the workforce marks a significant milestone in your life, and with it comes the responsibility of planning for your future. One of the most important steps you can take is to start thinking about your retirement plan. While retirement might seem like a distant reality, beginning early can set you on a path to financial security. Understanding some of the general terms and different plan options before you dive in will help with these key decisions.

Retirement plans are financial arrangements that allow you to save and invest money for your post-work years. The most common types are:

401(k) or 403(b): Offered by employers, these plans allow employees to save a portion of their paycheck before taxes are taken out.

IRA (Individual Retirement Account): This personal savings plan may offer tax advantages for setting aside money for retirement. There are two types of IRA accounts:

• Roth IRA: Contributions made to this type of account are often referred to as “after-tax,” which means these are funds you have already earned and paid taxes on. These funds will grow tax-free, but they don’t provide any current-year tax benefits. Because contributions are made with after-tax dollars, withdrawals in retirement are tax-free.

• Traditional IRA: Contributions to this type of account can be pre-tax or after-tax dollars. These funds will grow tax-deferred and may provide immediate tax benefits. Withdrawals made in retirement will be taxed as current income. If withdrawals are made before retirement age, they will be taxed as income and also incur a 10% early withdrawal penalty.

Brokerage: These types of accounts, which let you trade securities like stocks and bonds, can be opened with several major financial institutions. You may be able to open these with lower minimum balance requirements, and they usually provide varying inexpensive investment options.

Key Terms to Know

• Compound interest: The interest on your savings generates additional interest, growing your money at an increasing rate.

• Employer match: Some employers will match your 401(k) or 403(b) contributions up to a certain percentage – it’s essentially free money!

• Vesting schedule: The timeline that determines when you gain full ownership of employer-contributed funds.

What to Look For

• Low fees: High management fees can eat into your savings. Look for plans with low expense ratios, which is the cost of owning different investments.

• Diversification: Your investment should be spread across different assets to minimize risk.

• Flexibility: Consider how easily you can change contribution amounts or investment choices.

The Power of Time

The earlier you start saving for retirement, the more you benefit from compound interest. Even small contributions can grow significantly over time. Choosing your first retirement plan is a pivotal decision. By understanding the basics and starting early, you can take control of your financial future. Remember, it’s not just about saving, it’s about investing in the life you want to lead when you’re no longer working. By creating a wise retirement plan now, you will be able to secure the financial future of your dreams.

Sources:

https://www.investopedia.com/retirement/roth-vs-traditional-ira-which-is-right-for-you/#:~:text=The%20key%20difference%20between%20Roth,get%20tax%2Dfree%20withdrawals%20later.

https://www.principal.com/individuals/build-your-knowledge/investment-product-and-account-terms-know

https://www.nerdwallet.com/article/investing/ira-vs-401k-retirement-accounts

https://www.northwesternmutual.com/life-and-money/compound-interest-101-the-benefits-of-saving-early/