So you have reached the ripe old age of 25-ish and you are already ready for retirement. Well, join the crowd. More and more people are finding themselves sick of the daily grind of the workplace and find themselves daydreaming of a work-optional lifestyle before they are too old to fully enjoy it. We are here to give you the basics of how you can set yourself up now for a retirement that is full of options and closer than you might think.
One of the most efficient ways to prepare for retirement and grow your nest egg is to make sure you are getting your employer match on your 401(k). If you currently work in a job that does not offer a 401(k) or possibly does offer a 401(k) without a match, that should be something you consider for your long-term career goals. It might be wise to target career opportunities that offer this benefit, and here’s why: getting the match on your 401(k) contributions is a sure-fire way to get an awesome, guaranteed rate of return on your investment.
For example, let’s say your employer offers to match your contributions dollar-for-dollar up to 3% of your annual income. If you contribute 3% of your income over the course of the year and then your employer also contributes 3%, that means your contributions made a 100% return on your investment! This is why the most important step early in your career is to make sure you are taking advantage of your entire employer match.
The next critical step in preparing for retirement from an early age is to pay off as much of your high interest debt as you can as soon as you can. This usually includes things like payday loans, credit cards, personal loans, or private student loans. The guiding principle here is this: it is almost impossible to out-pace high interest debt with smart investing. You can think of it this way: if you are investing for your future and getting an amazing return of 10% on your investment, but you also have a bunch of credit card debt that it charging you 17% interest, then you are actually going negative 7% because the high interest rate is canceling out the growth you are seeing in your investment. If your debt has an interest rate of 7% or lower, it probably does not fall into this category.
After you have taken advantage of your employer match on your 401(k) and paid down some of that high interest debt, a fantastic next step is to invest into a retirement account called a Roth IRA. Roth IRA’s are different from an account like a 401(k), which is tax-deferred. This means that you pay for contributions into your Roth IRA account with after-tax money, as opposed to a 401(k) where the contributions are taken out of your paycheck before taxes. This can be especially beneficial if you anticipate yourself having a higher level of earning later in life because you do not have to pay income taxes on the funds you retrieve from your Roth IRA, nor do you have to pay taxes on the gains in your Roth IRA because of interest.
Regardless of your income situation, many experts agree that it is wise to diversify your tax burden for retirement. This means it is good to have some funds you can access in retirement without paying taxes on them, and other funds that allow you to avoid taxes now and you end up paying them later like the 401(k). Roth IRA’s have a contribution limit of $6000 per person per year and they are only available to folks who earn less than $144,000 per year as a single tax filer or $214,000 per year as a married couple.
This is the final, critical step as you prepare for early retirement. You need to have some money coming in that does not require your every-day presence or attention (otherwise, you aren’t retired, you’re working). Retirement funds are fantastic places to grow your nest-egg, but there are penalties for accessing your funds before you are 59.5 years old. This means that you need streams of income to cover your lifestyle before you can draw on your retirement accounts.
Our recommendations for cash-flowing assets are things like stocks that pay dividends, rental properties, and businesses you can own that do not require your presence to run. These each take work and experience to find success, but they are more accessible than you think if you take control of your budget and put your mind towards making your money work for you.
Our product will soon be available through a bank or credit union near you. In the meantime, join our 10,000+ person waitlist receive company updates, helpful financial health articles and more.