Investing now for retirement pays off later

Investing+now+for+retirement+pays+off+later

courtesy rivercitiesbank.com

The years in your early 20s are the best time to set yourself up for financial independence later. You don’t necessarily need a large amount of start up money; if you invest only $50 per month into an investment account earning eight percent, after five years you will have $3673.

Bill Boyer, OSCPA Ambassador

When I opened an IRA (Individual Retirement Account) a friend posed the question, “You’re saving for retirement now? Why? You’re in college.” I responded simply, “I want to be rich.” Do you want to be rich? Of course you do. Everybody does. Why is it then that so few young people invest their money at all? Many claim that they lack money to invest, do not know how to choose investments, or are generally afraid of the stock market.

Fortunately for you, none of these arguments are valid. You can start investing money right now. Investing for retirement is the single best way to become rich. So, either get busy inventing the next Facebook or learn how to invest. The decision is yours.

Many young people fail to invest money is because they think they do not have enough money. In reality, you only need $50 to start saving for retirement. People also worry about not knowing how to pick investments and are therefore too frightened to think about investing. Luckily, investing is not about picking stocks and can be done with very little research. Many young people recently watched their parents’ retirement accounts shrink, which is certainly another reason to be hesitant. However, a better way to perceive this situation is that there has never been a better time to buy investments because they are basically on sale.

Many people, hearing that they could start investing with only $50 might scoff at the small amount of money and think that it is not worth the trouble. Consider this: if you invest only $50 per month into an investment account earning 8 percent, after 5 years you will have $3673. The years in your early 20s are the best possible years of your life to set yourself up to be financially independent later. If you think that there is no way that you can afford this now, begin immediately after college instead of buying a new car or a fancy apartment. Those items are luxuries. But being financially independent is a much better luxury.

So how do you find this magical investment account that earns 8 percent annual returns? The answer is an Individual Retirement Fund that allows you to invest up to $5000 per year and grow your money without paying taxes when you withdraw it later in life. You can remove your principal (anything you have put in the account) without penalty, but if you remove any gains you have made from the account before you are 59.5 years old, there is a tax penalty.

Once opening a retirement account, you can place your money in a variety of different investments like stocks, bonds, and mutual funds. So how do you get out of having to pick stocks? Most investment companies which are discussed below offer target retirement funds which manage all of the “investing” for you. These types of funds automatically invest your money in the entire market of stocks and many bonds. Your money is extremely diversified among various industries, countries, and level of risk. As a result, the return you will earn will be equal to the entire market which has historically been around 8 percent.

As you become older, your target retirement fund will automatically begin investing more heavily in safer investments and take your money out of riskier investments so that you can feel comfortable withdrawing your money upon retirement. This method of investing will not make you rich overnight, but it is saves you the stress or hassle that comes with “picking stocks”.

Here are some simple steps to save for retirement now:

 

1. Pick a financial institution: Vanguard, T.Rowe Price, Schwab, and Fidelity are all great choices. Many require a minimum beginning balance of $1000 to $3000 but will waive this if you agree to contribute $50 per month. This can all be done online.

2. Make an electronic transfer from your online bank: You can either do a one-time beginning payment or set it up so that each month, a small amount of money is transferred from your bank account to this investment account.

3. Choose your investment: As I stated previously, I highly suggest choosing a target retirement date which automatically diversifies your money and earns health returns. If you would like have a more hands-on approach to investing, feel free to perform research and manage your account. However, the method I suggest gives plenty of returns for very little effort.

 

This process can be done within two hours, assuming you spend one hour investigating different institutions to see which you prefer. Admittedly, this strategy of getting rich is about as sexy as a crocheting convention. However, this method is designed so that you can become financially independent without the stress, worry, or research involved with other strategies.