It’s never too early or too late to begin investing – but the sooner you start, the more time you will have to take advantage of compound interest and asset appreciation. You can start putting money away as soon as you turn 18, or even sooner if you’re earning a paycheck.
Some people falsely assume that they need to be making a lot of money to invest in a savings plan. This couldn’t be further from the truth. Even saving $20 every paycheck is better than not saving at all.
Some financial institutions offering traditional IRA and Roth IRA accounts don’t require a minimum deposit to sign up or have very low minimum contribution requirements. It’s never been easier for young people – or people of any age – to start saving for retirement.
Choosing Between Paying Off Debt or Investing
This is a tough choice for many people. Having as little high-interest debt as possible is essential to successful investing. If a substantial chunk of your income goes to paying off your debts, you may not have enough funds left over to invest in a meaningful savings plan.
Your investment growth might also be dwarfed by your debt’s interest accrual, which means in the long run you’ll have more money by paying off your debt than you would by investing that money.
The calculation is very personal. You essentially need to determine whether your investment dollars will grow at a faster rate than your debt’s interest. You may be able to use accrual calculators to figure out the math. Since no investment is really guaranteed, it’s not always easy to accurately estimate the rate of return your investments will earn.
That’s why, for many people, paying off certain types of debt before saving for retirement makes the most financial sense.
Not all debt is the same. If you have a low-interest mortgage or auto loan it likely makes sense to prioritize your investments rather than paying off your mortgage early. If you’re carrying credit card debt at a 15 percent APR, it very likely makes sense to eliminate that debt before you aggressively invest for retirement.
The Financial Benefits of Investing Early
Waiting until your 30s, 40s or 50s to start saving for retirement can cost you hundreds of thousands of dollars in compound growth.
For example, if you open a Roth IRA savings account at age 25, make an annual contribution of $5,000 and earn a 10 percent rate of return, you will have accumulated close to $2.5 million by the time you’re 65. On the other hand, if you start the same process ten years later, you will only accumulate $905,000.
Ways to Start Investing
Invest in a Roth IRA
You can put after-tax dollars into a Roth IRA, which means you won’t have to pay taxes when you withdraw money from it in retirement. While a 401(k)s can be a great savings vehicle, you’ll have to pay taxes on the growth in your 401(k) when it’s time to withdraw those funds.
Many retirement savers also like Roth IRAs because they are usually self-directed. You may have limited self-direction options with a 401(k), but a Roth IRA can be used like any other investment brokerage account.
Contribute to a 401(k)
If you work for a large company or organization, chances are they offer their employees a 401(k). This employer-sponsored savings plan allows you to put a portion of your income into a retirement account. Saving via a 401(k) is relatively easy and doesn’t require a whole lot of discipline on your part. Contributions are automatically and consistently deducted from your paychecks, so you never have to consciously set aside money in savings.
Employers often match a certain percentage of their employees’ yearly salaries. For example, if you make $50,000 and your employer matches six percent of your salary, they will contribute $3,000 to your retirement plan. Taking advantage of matching funds is essentially like giving yourself a raise.
Work with a Financial Planner in Arizona
The success of retirement savings is highly dependent on the rate of return your money can earn. There’s no sure-fire roadmap to maximize your return, which is why many retirement savers turn to investment experts with a track record of success.
At Fullerton Financial Planning, we work with a diverse clientele, ranging from Millennials to Baby Boomers. We will help you carefully craft the best retirement strategy that matches your unique goals and needs.
To speak with a financial advisor, call our Peoria office at (623) 974-0300, our Tempe office at (480) 912-4500 or fill out our pre-appointment form.
