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If You Ever Want To Retire, Start Investing Yesterday

by on March 28, 2012

If You Ever Want To Retire, Start Investing Yesterday

Okay so you’re young, freshly employed and one credit card away from being considered an official adult – which means it’s time to start talking about retirement. Now that you have a steady stream of income, planning for the future should be first and foremost on your “to do” list. After all, retirement isn’t a given like it was for your parents’ generation.

With the economy still struggling to get back on its feet, more and more people are finding themselves forced to work long after their 65th birthday just to keep their heads above water. If you don’t want to be a part of America’s growing white-haired workforce, then you need to start planning for your golden years NOW.

The tried and true approach to retirement finances is the Roth IRA. If you’ve ever taken an econ class in high school or college, then you’ve undoubtedly heard how a 25-year-old can earn $1.4 million for retirement just by putting $5,000 a year into one of these savings programs. In a nutshell, a Roth IRA will return about 8% of your total investment annually in interest. As you contribute to the IRA, this interest will start to add up – like it does on your card – so that after 40 years, it will account for 86% of your total savings. Now, that’s a lot of money, but there’s a catch. You can only enjoy the tax-free benefits of a Roth IRA if you wait until you’re 65 to pull the money out. While you can withdraw your contributions to the account whenever you like, you can only withdraw the interest when the IRA matures or else you have to pay taxes and a 10% penalty. The only exception to this rule is when you want to make a down payment on a home.

While a Roth IRA is superior to simply stashing your money away in a savings or money market account, the yearly contributions and strict withdrawal rules can be costly for young professionals. As a result, many financial experts are advising young people to invest in the stock market instead. Studies have shown that by exposing yourself to the market while you’re young, you can reduce your lifetime risk of a bad investment by 20%. On top of that, you can earn exponentially more money over time by diversifying your money – for example, putting it into savings bonds, sure-thing large-cap indexes and risky-but-rewarding small-cap indexes.

So how do you get started in the stock market? Well, the first thing you need to do is pay off that one credit card balance you’ve left lingering since college. Since you’re going to be tying up a significant portion of your income for the next five years, you’ll want to take care of all your debts, including your credit card payments. Once you’re fully in the black, it’s time to decide how to split up your investments. We recommend putting your money into large capitalization indexes – think Wal-Mart, Microsoft and Google – and savings bonds until you’ve got a little more wiggle room to take a chance on small-cap investments like tech start-ups. After you’ve got your investment plan in order, the only thing left to do is to contribute a portion of your paycheck every month, and you’ll be off on your way to a financially secure retirement – and maybe even another card or two.

Keep in mind, this is a quick and dirty explanation of how the market works. Investing in stocks – especially those short-term investments that make middle classers into millionaires – is a complicated subject. It can take years to figure out, so we suggest taking a class and doing some research on your own before you start moving to riskier investments. The important thing is to get started while you’re still young. That way, by the time you retire you’ll have enough in the market to be able to sell off all your shares and cruise into your golden years in style. As far as this one credit card blog is concerned, that’s something worth working towards.

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