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It's Never Too Early To Build a Nest Egg

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By: The LearnVest Staff

The topic of retirement is daunting, we know. So take a deep breath, we’ll make it easy!

Retirement is expensive. We’re not just talking about fancy vacations; we’re talking about critical expenses like proper healthcare and trips to see your children.

Learn: Experts suggest that the amount you’ll need to live on during retirement equals between 70 and 90% of whatever you made in the years before that. Saving early makes a real difference.

If you contributed to a Roth IRA every year starting at age 20, you could retire as a millionaire! Here’s why time is your biggest asset: Chelsea and Katie both put in $24,000 over the years, but Chelsea began putting in money ($50 per month) at age 25 while Katie began saving ($100 per month) at age 45. Even though they both put in the same total amount, by the time they are 65, you can see that Chelsea has almost twice as much money to retire with as Katie. Thanks to compounding interest, Chelsea’s savings have earned more interest on interest over time than Katie’s.

 

 

We’ll say it again, starting early really matters. Time and compounding interest are everything to you. Retirement IS a discussion you should be having today.

Once you’ve committed to saving money for retirement, the next question is what’s the best type of account to save it in? Below are the three main retirement vehicles:

  1. 401(k) An employer-sponsored retirement account that’s funded by contributions from your paycheck. Many employers even match your contributions, in which case we recommend taking full advantage of the match, because it amounts to free money! With a 401(k), your contributions are tax-deductible and tax-deferred, which means that you won’t be charged taxes until you’re ready to take the money out at retirement.  Click here to learn more.
  2. Traditional IRA Anyone who has income can open a Traditional IRA. Similar to a 401(k), your contribution is tax-deductible and grows tax-deferred until retirement. You are penalized for removing money before you’re 59.5 years old, but there are exceptions if you’re using the money to buy your first home, pay for higher education, or for extraordinary medical costs or disability. Click here to learn more.
  3. Roth IRA A Roth IRA is considered “tax exempt,” meaning you put money in that you have already paid taxes on—so your Roth investment grows tax-free. You can open a Roth IRA if you make less than $105,000 per year as a single person or $167,000 as a married couple filing together. Roth IRAs have many perks, so they are often the favorite investment vehicle of experts. Click here to learn more.

In a year, you can contribute to both a 401k and an IRA (Roth or Traditional). The three accounts are summarized below:

 

 

LearnVest is one of the leading independent personal finance websites for women.

Read LearnVest Founder Alexa von Tobel's tips on how to start your own business.

More by The LearnVest Staff: A Cheat Sheet for Investing

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Comments

  • I found this article to be an excellent source of advice. As a recent college graduate, I had been mostly unaware of the importance of contributing to 401Ks. Seeing the graph of savers (Chelsea vs. Katie) really illustrated how important saving now--and saving the maximum I can--will benefit me come retirement.

    I recently read a WSJ article about personal finance and thought it was worth noting the author's most important tip to "boost your nest egg" is "Good health" because "Medical bills are among the biggest nest-egg sappers." (http://online.wsj.com/article/SB127698082404208441.html?mod=WSJ_PersonalFinance_PF4)

    Posted by mbeardsl, 25 June 2010.

  • Thanks for the good info! I just graduated college, so it's probably a good idea for me to start saving (after I pay off those pesky student loans).

    Posted by dwheel, 5 June 2010.

  • Can the other side of a current issue also be addressed? How do you take care of aging parents that did not plan and prepare for today’s cost of living? We are close to retirement age (60-61) and we have had to use 401K savings to pay the $4000 monthly fees for the residential care of my mother. She had a stroke 5 years ago and lost her equilibrium and balance, uses a walker 100% of the time and cannot live alone. She falls constantly, she cannot prepare her meals alone, is forgetful but not bad enough to qualify for the long term insurance that we have. Our other mother has been in hospice twice and come back from the brink. Our father is angry and frustrated that his physicality is failing him and he cannot do as he use to. They both require time and assistance in shopping, transportation, etc.

    Posted by getting there, 4 June 2010.