If you’re relatively young, retirement is a stage of life that you probably don’t put a lot of thought into. Yet it’s precisely when you are young that you should begin saving for your golden years, because you can utilize the power of time and interest to make your money grow. The earlier you start, the more likely you’ll be in good financial shape when you retire. According to experts, you should save approximately 10 times your pre-retirement salary, invest it and expect to live on about on 80% of your pre-retirement income.
There are multiple ways to save for retirement, but one excellent approach is to put money into a Roth IRA, which stands for “Individual Retirement Account.” The perks of a Roth IRA are that you don’t have to pay taxes on any of the interest it earns, and you can withdraw the money tax-free after age 59½ so long as you’ve had the account for five years. And, if an 18-year-old invests just $6 a day in an IRA, with an expected rate of return of 8%, they could potentially become a millionaire by 65, the age of retirement.
First: Don’t Make This Mistake
However, according to finance influencer Erika Kullberg, you could also make a very big mistake that leads you to having nowhere close to that million dollars.
In a recent video she explained that a close friend of hers had been putting money into his IRA for 15 years thinking he was earning exponentially more. Alas, he’d basically been using his IRA as a big savings account.
Kullberg explains in her LinkedIn post the common mistake people make: “They’ll open a Roth IRA, fund it and then assume that they’ve completed all the steps. The critical forgotten step is that once you fund your Roth IRA, you actually need to decide what to invest the money in (i.e., stocks, ETFs, mutual funds). If not, your money will just sit there collecting minimal interest.”
So simply putting money into an IRA won’t make anyone a millionaire; to grow your money in an IRA, you need to choose places for that money to go.
Work With a Financial Advisor
To avoid making these kinds of mistakes, it may be wise to work with a financial advisor, according to Dominic James Murray, CEO and independent financial advisor at Cameron James.
“The world of investing can seem complex and intimidating. We help demystify the process, tailoring strategies to your unique situation and goals. Think of an advisor as your personal financial coach, guiding you through the IRA landscape, helping you make informed decisions and ultimately, turning the dream of financial independence into a reachable goal,” he explained.
Educate Yourself About Investing
If you don’t plan to work with a financial advisor, then you’ll need to educate yourself about financial concepts and ways to grow your money. Some starting points are things like learning about asset allocation — where you want to put your money. For instance, will some of it go to mutual funds, and another chunk go to stock funds? What is your risk tolerance: Do you want to invest your money in ways that are likely to grow faster, but also come with bigger risks of loss? Do you know how to build a diversified portfolio, making sure you are investing in a number of different sources so that you grow your money without taking big losses? The more you know about investing, the wiser you can be with your IRA and the more likely you are to reach your financial goals.
Start With a Larger Initial Balance
Another approach to grow your money faster in an IRA is to put in more than just $6 per day, according to certified financial planner Robert Duncan with Global Impact Wealth Management.
“Obviously, starting early is essential along with consistency of contributions,” Duncan said. “Starting with larger initial balances would help.”
However, he does point out that there are Roth contribution limits to contend with; for 2023, $6,500 is the maximum.
Consider a Roth 401(k)
A way around the limit of a Roth IRA, Duncan said, would be to utilize a Roth 401(k) or 403(b) which would allow for larger contributions and potentially include matching contributions from an employer.
“Taking advantage of a Roth 401(k)/403(b) with the match then would allow someone to potentially contribute $2,190 ($6 per day) from their income and receive a 100% match, doubling their contribution. In this scenario, at 8% per year an individual would hit $1 million after 38.35 years, shaving eight years off their timeline.”
Many employers only offer traditional 401(k) options, but it’s worth asking if yours has a Roth.
In general, when it comes to investing, Duncan explained, “Compounding is a powerful ally, and most of the benefit comes as the balances grow.”
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