I’m 34 and I’m still getting my BA, I don’t have a career yet I just work at a coffee shop right now. A friend of mine who is a few years older sometimes tells me I should start saving for retirement. How? Why? I don’t make much money so I wouldn’t be able to put much away. Is it really something I should worry about right now?
In: Economics
Assuming a 7% rate of return on your investments (good but not crazy good), your money will double every 10 years.
You have about 30 years to retirement, so 3 doubling periods. If you put away $1000 today, you should have $8000 by the time you retire ($1000 doubles to $2000 after 10 years. $2000 doubles to $4000. $4000 doubles to $8000).
Even a relatively modest investment is better than nothing.
This bit is specific to the US so if you’re not American, disregard.
Since you’re not making much money, open an IRA. You put after tax money into an IRA. That means your income taxes come off the top and you put what’s left to your expenses and an IRA. IRAs grow tax free. So no matter how much money it turns into in the future, it’s yours free and clear.
A 401(k) comes out before your taxes (like employer provided health insurance premiums). That’s great for lowering your taxable income and if you have an employer who matches, it’s free money. But when you cash in your 401(k), you pay income tax on it.
If you’re not paying much in income taxes because your income is low, you don’t need the tax break of the 401(k).
>How?
Most large companies will give you the option of enrolling into a retirement plan where a small cut of your paycheck (something like 10% but it’s up to you) gets deposited into the account. The money is managed for you, when you’re young it’s put into high risk, high reward investments like stocks and gradually as you get older the money is shifted towards more stable investments like government backed bonds. These accounts offered by your company usually incentivize savings by matching a certain percentage of what you put in, e.g. they’ll offer 5% matching, if you put in 10% of your paycheck they’ll add in another 5% making the total 15%. If your company doesn’t offer a retirement plan your bank or credit union usually does. They’re called IRAs or individual retirement accounts.
>Why? I don’t make much money so I wouldn’t be able to put much away. Is it really something I should worry about right now?
Because social security alone won’t be enough for you to live off of and eventually you will want to retire; you don’t want to continue working until you’re 80 because you didn’t save money when you had the chance. Most jobs these days also don’t offer a pension that pays you for the rest of your life after you retire.
A lot of people rely on 401(k) (employer provided retirement plan) or Individual Retirement Account (IRA) to save for retirement. Anyone can open an IRA at any time, it’s worth looking into. Even if you only put a little bit away each month it’ll grow faster than it would if it were in a savings or checking account.
Better to start looking into things now rather than later. Every year that passes, your money loses some of that buying power and it takes *more* of an investment to make up for what someone else already made saving *less* money (for instance, a person who put away just $500 at age 18 might have grown that to $5,000 by the time they are 40. Not a lot, but if you’re 34 and put away $500 it might only grow to $1,000. This is a really basic example that’s not rooted on hard factual numbers, just trying to illustrate the point).
edit: The advantage to either of those retirement plans is that they are tax deferred. With one type your money is dropped in after it’s taxed and then it can grow and grow and you don’t pay taxes on whatever you withdraw. With the other type the money is *not* taxed until you actually start withdrawing it.
To be honest you should have started worrying about it 10 years ago. You need to look up conpund interest on Youtube and start doing some math on what you’re savings are gonna look like.
Like other people mentioned, compound interest adds up over time. The market as a whole generally goes up 7% a year. There are low cost index funds that buy a bunch of the market, that’s definitely the way to start versus buying a few stocks and guessing what’s going to do well.
So ignoring fluctuations, your money will go up 1.07 times per year. It doesn’t seem like much, but it means that every $100 that you can invest now will be worth (roughly) $761 in 30 years from now, when you’re near retirement. Plus you’re going to live _into_ retirement, so at 40 years out (when you’re 74) every $100 you can save today will be worth $1497.
I’m older than you, about 20 years from retirement. Every $100 I invest will be worth $387, and I didn’t save much when I was younger so I’m trying to catch up despite the lower multiplier. In retrospect I wish I had saved at least something in my twenties, with that sweet 14.9x multiplier, but hindsight and all that. But the point is that investing early makes a significant difference, deciding to save for retirement at 50 can make for a rough time.
You can do this investment in what’s called a taxable account, where you can sell the stock at any time but you pay taxes on it. Or you can do it in one of several types of retirement accounts (401K, IRA, Roth IRA, etc). You still buy individual stocks or index funds in the account, but you can delay paying taxes on your profits, which can be a benefit. The downside is that you often can’t get to the money until retirement age without an additional penalty (they really want you to use it for retirement).
A single concrete recommendation is to look at a Roth IRA. If you aren’t making a ton of money right now (like under $52K single thus in the 12% or lower tax bracket) it’s probably the way to go. But don’t take my word for it, read up on it. I’m a fan.
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If you start putting even a little away now, it’ll slowly grow by the time you retire. If you keep putting just a little away, then you keep adding to the pile, and every bit that you add means slightly larger interest too.
If you put *nothing* away now, then you’re preparing to have nothing later.
Solid answers here and there seem to be two parts to your question:
1) how does saving for retirement work, and
2) how can you specifically save for retirement considering you don’t make much money.
Others have replied how saving for retirement works and, generally speaking:
* you put money away
* there are various tax incentives to help you both put more money away (ex: 401k) and take money out (via lower tax rates)
* due to compound interest, you generally make a lot more money and the sooner you start, the better even if it’s a small amount.
Here’s an example of how much money you can have at 67 (general retirement age) if you put $20/mo every month and you make 5% average yearly return (being conservative since it’s more like 7%/year). I’m using 400 months of contributions which is a bit more than 33 years:
* you would have contributed 400 months * $20/year = $8,000
* your total with 5% yearly return and compound interest is… $20,525.71 or a gain of $12,525.71, i.e. you more than doubled your investment
* by the way just for fun, if you put in $100/mo then you would have invested $40,000 but your total would be $102,628.54. Compound interest really adds up. Oh and it’s $158,444.33 if you go by the more historical 7% return rate.
Now let’s take your specific case and where you – who doesn’t make much money – can do right now. This might not be popular but I wouldn’t start with a retirement account. I’d have a budget first and if you’re saving any money, I’d make sure that you pay off your credit cards first. That 12%+ interest rate you won’t be paying is a better rate of return for now for you. You should only start putting money into retirement accounts once you have no credit card debt and your other debt is manageable (this excludes a mortgage).
Rule 2.
r/personalfinance might know better.
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