How to Save on Retirement at 20 Without 401 (K)
How can you save up for retirement if your job doesn’t have a 401 (k)? This is what we are discussing this week.
Each Monday, we address one of your pressing personal finance questions by seeking advice from several financial experts. If you have a general question or money issue, or just want to talk about something PeFi-related, leave it in the comments or email me at [email protected].
This week a question from Margaret:
My company does not currently offer 401 (k), so I have a Roth IRA. However, I feel that saving with an annual limit is not enough. Do I have other retirement savings options?
Also, I’m 26 years old, so should I really look for retirement savings options or just invest? If the second … where should I start?
This is what individual experts usually say about a problem that affects each person differently: if you need personalized advice, you should see a financial planner.
Savings for retirement at 20
It’s great that you’ve already peaked your Roth at 26. It may not seem like much money when you constantly hear that you need to save more for retirement, otherwise you’ll end up living in your van when you’re in its 70s, but it’s a pretty significant investment for someone your age.
However, it is important to consider other options. For starters, do you have a money pillow? The standard advice is to put off living expenses for three to six months, and if you live in an expensive city like New York or San Francisco, that will be a lot of money.
So if you’re making the most of your Roth but don’t have, say, $ 10,000 in cash , you should focus on that before investing more. And you’ll want to keep this in a high yield savings account (check Ally or Synchrony). Rates have been on the rise lately, which means you can find interest rates that are close to two percent. It won’t make you rich, but it’s better than what we’ve seen in years. Keep track of account minimums and hidden ATM access fees.
In addition, it makes sense to start paying off the debt now, if you have one. Debt reduction at high interest rates will save you a lot of money in the long run, so check these boxes and then you can start looking for other investments.
All this said: yes, keep investing in retirement. In many ways, 26 is a very young age and you probably aren’t making a ton of money yet. But these are critical years for investment. Amin Dabit, director of advisory services at Personal Capital , digital capital manager, says you don’t want to keep too much of your savings in cash (although you should have that fully funded emergency hidden away that I mentioned above).
“By investing early on, you can build a diversified portfolio that will help you reach your financial goals, such as buying a home, faster,” says Dabit. the money works for you, the better you will make a profit in the long run. “
Retirement cars like the Roth have tax breaks and will give you a head start on meeting your goals. Once you’ve made the maximum and set the rest of your financial priorities, you can start exploring other options for investing in a taxable brokerage account. Robo consultants like Wealthfront and Betterment and investment apps like Acorns offer low-cost investment options in a variety of companies and funds. Ellevest is a platform geared towards female investors, not “investing for her”! and a lot more on how to help women prioritize (its fees are also pretty low, which means you don’t pay Pink Premium).
Just understand that there are always tax implications when you invest. Any profit you make from the sale of investments that you have acquired in your taxable account will be taxed at the long-term capital gains tax rate if you withhold them for at least a year, which is probably much lower than your personal income tax rate. (if you have held the investment for less than a year, you will be taxed at the personal income rate). You also have more flexibility with these accounts than your Roth – you can withdraw money anytime and for any reason (just keep an eye on income taxes).
With taxable accounts, you want to invest for the long term, just like with your retirement accounts. Holding a wide variety of indexed ETFs / mutual funds is still your best bet (both in terms of profit and tax avoidance), but you can also buy individual stocks if that’s what you’re interested in – just avoid actively managed funds, which are more expensive, trade more frequently (which means more taxes), and do not perform better than passively managed index funds. And you can hold these accounts until you retire, which gives yourself more flexibility when you get there to receive payments with minimal tax efficiency.
When comparing offers, pay attention to: Investment options, fees (management fees and fund) and minimum amounts to open. Wealthfront and Betterment are better for investing in mutual funds and ETFs (here’s a good comparison of the two ). Acorns is potentially easier to set up, but you’ll want to keep an eye on fees – $ 1 to $ 3 per month doesn’t sound like much, but adds up (and doesn’t include fees charged by the investment funds themselves.).
If you have a high deductible health plan, you may also want to consider contributing more to it. You will lower your taxable income and be able to carry that account with you to retirement to help offset medical expenses (you will have to make more frequent choices for open enrollment).
The last option is to keep some of the money saved on a CD. These products are boring, but their prices go up, which makes them more attractive. They are safer than stocks, but will require you to set aside money for a predetermined number of months or years. So if you choose a five-year CD, but, for example, after two years you need money, you have to pay a fee. However, you are guaranteed a certain rate of return, which is attractive to some investors.
But the most important thing, as Ron Lieber, your Money columnist for the New York Times , told me last year , begins now.
“I started early. The longer your money and investments have to grow before you need them, the more money you will have, other things being equal, ”he said. “Every little thing matters if you need to develop the right habits.”