| By Dana Carlucci |
This mentality is really not at all unusual. I still remember when I first began to work and make some money back in high school. At the time investing was probably the furthest thing from my mind. All I could think of was how to spend my money. My father told me that he had thought the
"Investing while you are young, you learn to become a better investor for the future." — Jack Hsu |
Even though retirement may seem like a lifetime away, it comes sooner than you think. Many people do not realize it, but they may spend as much time in retirement as they spend working. And for those of us who do not have the conventional job -- where they receive benefits and are able to participate in their company's retirement plan -- saving for the future may be out of reach.
The question is, where can you stash your cash? There is one tax-deferred savings vehicle which is universally available, the Individual Retirement Account or IRA. Tax deferred means that your IRA investments can grow faster because the earnings that you accumulate will be free from federal income taxes until you begin withdrawing from your IRA.
Marshall House, a certified financial planner with the Vanguard Group (a financial/investment service group) urges young people to start saving for the future now. "This is the best time to save because you can put the least amount of money away and make the most of it," House said.
Investing your money in an IRA is simple. You don't have to watch CNN 24 hours a day or worry about having to roll your money over into another investment every couple of years. Once you have established your IRA, you just contribute money each year and sit back and watch it grow tax-deferred.
How much do you need to start an IRA? The minimum initial investment for an IRA is usually $500, depending on who and where you invest with. You can contribute a maximum of $2,000 to your IRA each year. Although many investment groups do not require that you make a contribution to your IRA every year, you may not make up the missed contribution in later years.
Can you withdraw your money if necessary? The law imposes a 10% tax penalty if you withdraw from your IRA prior to age 59.5 for reasons other than a disability. This 10 percent tax is applied, in addition to ordinary income tax, to the taxable amount of your withdrawal.
Once you have decided to start an IRA, the next step is to decide how you want to invest it. You can invest your IRA in various forms; through stocks, bonds, cash reserves, mutual funds, or IRA certificates of deposit (cd). The options are endless. "The key element in investing your IRA," says House, "is to diversify your investments." House says that a mix of stocks, bonds that pay high levels of interest, and cash reserves have proven to yield the greatest long-term investment returns. The investment group that you choose to start your IRA with will choose the actual stocks, so you don't have to worry about watching the stock market. House suggests you take your age and subtract it from 100. This is what percentage of your IRA should be invested in stocks. If you do want to invest in a particular area of stocks, such as health plans, you may inquire about this with your investment group.
What type of investor are you? According to House, people between the age of 20 and 29 have the luxury of being able to take maximum risk. Aggressive risk investors are generally willing to assume a somewhat large degree of risk in hopes of obtaining large gains. Such investors usually have a greater amount of investing time ahead of them. Aggressive investors tend to invest most of their IRA in stocks. They invest with the knowledge that with this type of investing there also comes a high level of risk and possible loss of their current or original investment.
On the other hand, if you have less investing time ahead of you or are the type of person who won't be able to sleep at night knowing that there is a chance you may lose money, you may be a conservative investor. These investors are willing to accept lower returns in order to minimize their risk. They usually choose investments with secure interest rates and a guarantee that their original investment will be preserved. Understanding your investment personality will help you determine which types of investments are best suited for you.
Although young people or part-time workers may not be earning much of an income, through the power of compounding, even a small sum invested aggressively can grow substantially. If you invest $2,000 a year for the first eight years of a 40-year period with 10 percent interest, you could earn over $500,000 by the end of this time.
Can you have both a company retirement plan and an IRA? Depending on your annual income you may be able to participate in your company plan and take a tax deduction on a IRA. If you earn less than $25,000 ($40,000 for married couples), your IRA contributions are fully tax-deductible. If you earn over $35,000 ($50,000 for married couples) your IRA contributions are not tax-deductible.
Today people are retiring earlier and living longer. According to the U.S. Census Bureau, the fastest-growing population segment today is individuals over the age of 85, and it's anticipated that there will be more than 2 million people over the age of 100 by the year 2030. Thanks to advances in medicine and healthier lifestyles, this trend toward a longer life span is likely to continue. Keeping this in mind, we need to plan for a retirement that could last 30 years or more, so we won't outlive our retirement money.
Inflation may also force the value of your retirement dollars down. Most people don't consider factoring in inflation until they have already retired. Once you retire you will no longer have a salary keeping pace with the cost of living.
House also warns against counting on Social Security to secure your financial future, because it is likely that the benefits will only decrease over time. Due to the sharp rise in the number of older Americans, there are only 2.5 working Americans for every person collecting Social Security. By the year 2040, it is estimated that there will be only one worker for every person in retirement.
"Investing while you are young, you learn to become a better investor for the future," said Jack Hsu, marketing and finance major at Trenton State College. "Investing is sometimes like an internship, you might not make a lot of money, but you gain a lot of experience." Hsu has worked for a financial group for the past four years and just recently returned to school to finish his degree. He actively participates in investing in the stock market.
Serious thought about retirement is something most people put off until it is almost too late. Making ends meet today is tough enough; planning for tomorrow can wait until tomorrow. For some people investing for the long term seems impossible. But the longer you wait, the harder it will be to accumulate enough money to live comfortably in retirement.