Archive for the ‘Retirement’ Category:
I’m 18! What Should I Be Doing With My Money?: Saving It For Retirement
Today’s post is a continuation of this week’s series: “I’m 18! What Should I Be Doing With My Money?“
Next up in this series, we’ll tackle what’s probably the last financial issue on your mind. Nonetheless, it’s extremely important:
Retirement!
Yes, I know none of us will be retiring anytime soon. But interestingly, we are the ones who benefit the most by saving. Those who wait to start saving will lose out on THOUSANDS, if not hundreds of thousands, of dollars by not starting as soon as possible.
Just one $2,000 dollar deposit in a Roth IRA (Individual Retirement Account) when you are 18 can grow to over $74,000 dollars by the time you are 65 (assuming an 8% return).
Invest the same amount when you graduate college at 21 and you’ll only have $59,000. Three years of waiting just cost you fourteen-thousand dollars!
Note: You don’t have to deposit $2,000 dollars if you don’t have that much. This is just to illustrate the benefit of starting as soon as possible.
Saving for retirement is easy. You just need to open a Roth IRA (Roth IRAs have numerous tax benefits that make them perfect long-term investing) and contribute money to it. Once it’s there, you can purchase investments like stocks, mutual funds, and index funds. To open the account you just need:
- Your social security number
- Your home address
- Your phone number
- And some money
If it helps, don’t consider this a retirement account. Consider it a freedom or opportunity fund. It’s purpose is to provide you with financial security when you are older and may no longer want to work. It simply gives you options later in life.
If for some reason you desperately need the money in a Roth IRA, you are free to take out whatever you have deposited. You cannot, however, take out your earnings until you are 59 1/2 unless you want to pay a penalty.
You can open a Roth IRA through many different companies and brokerage firms. I chose to open mine at E*TRADE. They don’t have any minimum account balance requirements, which is great for those of us who don’t have a huge cash reserve built up.
Saving for retirement is not something you want to wait around to do. There’s honestly no reason why you can’t open one the day you turn 18. I’m “only” funding my Roth with about $50 bucks, but it’s a start.
If you’d like, you can jump back to the previous post in this series: Learning the Basics of Money Management.
Exploring the Power of Compound Interest
If you’re reading this, you’re most likely a high school or college student. The thought of saving money doesn’t exactly excite you. But it’s important that you do. Your goals probably include getting a job, not retiring. But retirement will happen much faster than you think. Saving now will make the future a much better place.
You might be thinking “This is stupid, I could be using my money now to buy a new video game every week or I could have the newest iPhone.” Truth be told, you could do those things or maybe you already have. But now is still a great time, if not the best time, to start saving.
Still not sure if you believe me? What if I told you that you could save a little bit of money now and have a ton of money later?
Interested?
Follow along.
To illustrate my point, let’s take a look at Mike. Mike opens a Roth IRA on his 18th birthday. He puts 2000 dollars into the account that averages a return rate of 8%. He retires at 65. Guess how much money he has.
74 thousand dollars!
I’m not making this up, it’s just the way the math works.
But if Mike waits a few years and doesn’t start his account until he’s 25, he’ll loose 27 thousand dollars. This is why it’s so important to start now. By waiting, you are literally throwing money away.
If you thought that a single deposit of 2000 dollars resulted in a ton of money later, imagine what adding more money every year will do.
Adding 2000 dollars every year will net you over a million dollars.
I think a million dollars is worth spending just 2000 a year.
If you want to make a financially secure future for yourself, the time to start is now.
How to Open a Roth IRA (Do It Today!)
Now that we’ve talked about what a Roth IRA is, it’s time to set one up. To start an account, you have to first pick a broker (someone who buys and sells investments on your behalf). Luckily, it’s not hard decide if you’re young or broke or both.
Of the following companies that I researched, only one would allow me to open a Roth IRA with no minimum deposit or fees.
- T.Rowe Price
- Fidelity
- Scottrade
- Vanguard
- Zecco
- Charles Schwab
- TD Ameritrade
- E*Trade
The decision was pretty much made for me. While I liked Vanguard’s investment strategy (the company is built on index funds, which have low expenses with good returns), I didn’t want to wait to save up $1000 to go with Vanguard. (Other companies wanted at least $500)
Another plus was E*Trade has cool commercials like this one.
So, to setup the account, all you have to do is download this form. (If you’re over 18, you can open it online here.) It asks for the standard information that you’d give any bank when you open up a new account. Address, Social security number, blah blah blah.
There is one section where it asks what your “investment objective” is. I chose Growth, since I’m willing to take some risks (I have 40-50 years until retirement) but not complete chance like Speculation. For trading, I chose 0-3 per month, although I honestly have no idea how often I’ll trade.
In section 9, “Select Your Account Options”, I chose the E*Trade Financial Extended Insurance Retirement Sweep Deposit Account. This is basically just a saving account where your money hangs out until you invest it. Beside this section, you’ll notice you can choose to receive certain account information through the mail. DO NOT select any of these unless you want to pay a fee to E*Trade. (Hint: You don’t)
Once the form is filled out, put it in an envelope along with a check made out to E*Trade Clearing LLC for any amount. The address is listed on the 1st page, in the upper left hand corner. Mail it.
Seriously, that’s it.
Once E*Trade sets up the account, you’ll be ready to invest.
Start Saving for Retirement with a Roth IRA
Have you earned any income in 2009? It could be from the local pizza place, the American Eagle in your mall, or even the cash you received for walking the neighborhood dogs. If you do, there’s a great place to put part of it.
The place is called a Roth IRA. IRA stands for Individual Retirement Account. It’s named after William Roth. What’s so great about it?
What’s awesome is that they allow your money to grow to enormous sums. If you put $2000 a year in a Roth IRA from age 15 until 60 and the market returns 9%, (entirely possible over a period of 45 years by the way) you would have over a million dollars. That’s sick isn’t it? I may be geeky, but that seems really exciting. Even better, you can take this money out when you retire without paying a cent in taxes.
Another bonus for teens: You don’t have to pay income taxes unless you make over $8,950 a year. Since most teens never come close to this, it means that any money you contribute to a Roth IRA will never ever be taxed by the government.
But I don’t have two thousand dollars! What am I going to do?
It doesn’t matter. Open one up anyway. You don’t have to contribute two grand if you can’t or just don’t want to. What’s important is that you open it and put something in. In the future, when you get a “real” job you can start contributing a lot more. But there’s no time like the present and every year you wait, will cost you money. Not just a little money, but a lot of money, as in thousands of dollars.
What’s the Catch?
There aren’t too many disadvantages to a Roth IRA, but keep in mind:
The money you contribute has to be earned. This means you can’t just put in money you got as an allowance. If your parents are really generous though, they can contribute whatever amount you’ve earned and then let you “keep” your money in a savings account or even in cash. You might try to see if they’ll match your contributions. Example: “Mom and Dad, I’ve earned $1000 from mowing lawns this summer. I’d like to keep part of that money to use during the year, but I was wondering if you would contribute $500 if I put in $500.”
Also, you can’t access your earnings until you’re 59-1/2. This shouldn’t be a problem though because the point of this account is to save for retirement. This is not the account you use to save for a car.
You need to have proof you earned your income. This typically means filing a tax return. I know this sounds scary at first, but don’t worry, it’s really easy. I’m planning to write an article on how to file your taxes by the end of February.
If you aren’t 18 yet, you’ll need one of your parents to be the custodian on the account. This is because minors can’t legally enter into financial or contractual agreements by themselves.
Even with these requirements, the Roth IRA is a great way to prepare for your future. You’re young. You have a huge advantage over older people who never opened one. Use it.
Tomorrow, check back for: Where and How Do I Open a Roth IRA?
