Your odds of saving enough money to retire before 65 are very small. In fact, 46% of Americans are expected to work past the age of 65 – that’s almost half!
Do you have more money saved than the average American? Studies show that the average person has saved about $5,000 for retirement.
Many people don’t invest their money for a few reasons. I think the main reason is fear. Either they are afraid the market will crash, or they are afraid they will never have enough money to retire anyway, so they’d rather spend it now and enjoy themselves.
Let’s go over a few common reason why you will never retire. Hopefully this will open your eyes and you can start making some changes.
“I may die tomorrow”
People like to use this phrase a lot to defend themselves when asked why they do certain things. While this is true and anything is possible, it is also very possible that you live to be 80+ years old.
Think about that. Do you think you can be doing what you’re doing now at that age? Most likely it will be physically impossible. If you don’t want to be old and broke and dependant on others to take care of you in the future, you need to be working towards building passive incomes today, that will support you in the future.
Passive Income
There are many forms of passive income. I will go over some different ways in future blog posts but for this post, I mostly want to talk about investing in the stock market. You can invest through a retirement account or a regular brokerage. There are many advantages to investing your money into a retirement account however, there are some disadvantages as well.
Retirement Accounts
The main advantage of investing in a retirement account instead of a regular brokerage account is that your money grows tax-free. Though, if you plan to retire earlier then 59 1/2 you may not want to invest in a retirement account because early withdrawal comes with a 10% penalty.
My recommendation would be to invest in both types of accounts. Diversification is key. That way you could have the option to retire early, while also benefiting from a larger amount of passive income at the age of 60+.
So what retirement account should you choose? there are many options such as a 401k, Roth 401k, Roth IRA, traditional IRA, etc.
Roth vs Traditional
With most retirement accounts, you usually have two choices, a Roth option, or a traditional option. The main difference between these two is that Roth is after-tax contributions, while Traditional is pre-tax. The benefit of using a Traditional account is your putting your money into it before it’s taxed, which means you can contribute more.
However that money is taxed once you take it out, and any interest it’s earned is also taxed when you take it out. This might not make sense to someone that will be retiring at a higher tax bracket, which might be your situation.
Most people make more money as time goes on, not less. We also have no idea what taxes will be like in the future so it’s a bit of a risk to hope for a lower tax rate in the future. It’s better to just pay it now.
On the other side of the coin, you have the Roth option. This is the complete opposite of the Traditional in that your money will be taxed first before going into your account. The main advantage to this is that, when it’s time to take the money out, you won’t owe any taxes, neither in the principal nor in the interest it’s earned over time.
In my opinion, in most cases, I would suggest going for the Roth option first, before doing the traditional. Some employers don’t offer the Roth option for your 401k, however, you can contribute up to $6,000 a year into an individual retirement account, or a Roth IRA instead.
IRA vs 401k
The difference between these two is that the IRA is an individual account while the 401k is an employer account. Both of them have the Roth option, however, some employers may choose not to include it in their 401k benefit. The IRA has a yearly max contribution of $6,000 while the 401k is a yearly max contribution of $19,500.
If you can, I would focus on trying to max the Roth IRA first and then chip away at the 401k. Ideally, you would max out both but I know that’s not a realistic goal for most people. Just do what you can and remember, a little bit goes a long way with the power of compound interest.
Summary
- Almost half of Americans work past 65
- Average savings is a little over $5,000
- Invest in a retirement account such as a Roth IRA or a 401k
- Max out a Roth IRA first, then focus on your 401k
- Roth = After-tax contributions
- Traditional = Pre-tax contributions
- Start building sources of passive income today, so that you can retire in the future
- Through the power of compound interest, investing even just a little each month makes a huge difference.
