How to Invest for Retirement: Roth IRA and 401k

 

I work hard for my money. I also have about 30 years until I’ll be around retirement age. Regardless of how old you are, you should really think about investing your money.

 

I wish I knew smart ways to invest my money for retirement sooner, but late is better than never. If I had that knowledge when I was 18 or 19 then I could’ve had a lot of extra money saved. I’m lucky that I have a father who has experience investing money into stocks and bonds. I also have an interest in it because I want my money to work for me and grow.

 

If you are in your 30’s or 40’s, then it isn’t too late for you either. The other day at work I was shocked when I asked a few co-workers about our company 401K and they hardly knew anything about it. One of them didn’t know what they could invest in and the other had no idea how much she had invested.

 

This made me wonder how many people out there either don’t know much about saving for retirement, or even scarier, they aren’t saving anything. I get it, money is tight sometimes. Some of us live paycheck to paycheck because we have student loans, car payments, kids, bills to pay, etc. One of the smartest things you can do is really budget your money to see if you can scrape out even $100 a month to invest. It really depends on your income and all the expenses you deduct, but I’m going to explain why investing extra money in a Roth IRA or 401k can be the extremely beneficial.

 

First up is the Roth IRA. It can be started with a company such as Vanguard or Fidelity, I personally use Fidelity. The Roth IRA is great because you put in money and then choose what to invest in. You can invest in stocks, bonds, commodities, and other things like mutual funds and money market accounts. The benefit of a Roth IRA over a regular IRA is the taxes. The money you invest in it is not tax-deductible, but when you withdraw the money, after age 59, you pay no taxes on it. This is great because your money will hopefully grow a lot, and it is better to pay taxes on a small amount than a big amount. You will get a steady annual return if you invest smart, plus you’ll get compounded interest, and some of your stocks may have dividends that can be reinvested. There are plenty of compound interest calculators you can use to estimate how much you’ll have.

 

Predicting stocks is hard, and safe options like bonds grow very slowly. The smartest way to manage your Roth IRA is through Index Funds. An Index Fund takes a whole sector of the market, such as the Fortune 500 companies or International stocks, and calculates the average gain or loss of that sector. That amount is your return. It’s like have a tiny share of each stock for hundreds of stocks.

 

Warren Buffet, who many rightfully consider the god of investing, made a $1 million dollar bet that a company’s hedge fund (stocks an ‘expert’ picked) couldn’t beat an index fund he chose. Buffet got a 7.1% return while his competitor got 2.2%, a complete beat-down. A lot of index funds have shown to get a 7% annual return over the years, on average. Some years it may go up 12%, other years it may go down. But you can expect about a 7% annual return for the life of your investment.

 

Next up is the 401K. The 401k is the opposite of the Roth IRA, the amount you put in is tax-deductible, but you pay taxes on it when you withdraw it. This is why I prefer the Roth IRA, I don’t want to pay a bunch of taxes on the large amount of money I’ve amassed. One major advantage of the 401K is that a lot of companies offer you one and will match a portion of your money. For example, I put 3% of each paycheck into my 401K and my company matches that amount 15%. It’s free money and I like how I can set exactly how much I want to put away. It’s like having a very high interest savings account. The investment types for the 401K are usually the same as a Roth IRA: Stocks, bonds, index funds, mutual funds, etc. If you have a 401k through your company your options may be limited, but usually you can invest in any kind of security.

 

You can still play around with specific stocks and investments, but the index fund should be your main investment. If you see a company that you think has a lot of potential and their stock is low, go for it. For example, Uber announced they are going public and offering an IPO (initial public offering). Remember that you are trying to make the most of your money so you can retire someday and have a great quality of life.

Thanks for reading! Let me know what you think in the comments!

This site uses Akismet to reduce spam. Learn how your comment data is processed.