In this episode of In The Know’s Getting Rich, financial expert Carmen Perez gives the rundown on how to take those (scary but necessary) first steps to start saving for retirement — because it’s important!
1. 401K versus IRA
“A 401K is a retirement fund you get through your company which tends to come with contribution matching from your employer,” Perez says. “An IRA is an individual retirement account you set up on your own.”
But there are two different kinds of IRAs the traditional one and the Roth IRA.
“The main difference here is when the money actually gets taxed,” she explains. “With the traditional IRA, you pay taxes when you take the money out at retirement. With the Roth IRA, you invest your taxed income now and you don’t have to worry about it when you take it out.”
With a Roth IRA, you have the benefit of knowing exactly how much you have as you save.
2. When should you start saving for retirement?
Perez recommends starting a retirement fund in your early twenties (or ASAP if you’re older). This way you have a headstart on collecting interest, a.k.a. growing your money.
“The more time you have in the market, the more time your money has to grow. The less stress you have later on in life,” Perez advises.
“Just make sure there are no account minimums to open and then every single month, if you can, start allocating a little piece towards your retirement,” she says. “And maybe setting a goal for yourself, like $100 every month or every two weeks.”
3. Don’t sleep on employer matching
If you’ve got a gig where your company matches your 401K contributions, take advantage.
“Even if it’s a small percentage attached to a small contribution, it’s 100 percent free money,” she suggests. “The ultimate goal is to maximize your contributions each year, ideally to both your IRA and your 401K.”
4. Get started ASAP
When it comes to saving for retirement, Perez can’t emphasize enough that you should start yesterday. But that comes with a caveat.
“Before you start squirreling away your acorns make sure there aren’t any high-interest loans or outstanding credit card balances,” Perez says. “The money going towards interest on these debts is money that should be going toward your future.”
If you liked this story, check out more episodes of Getting Rich here.
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