Why You Should Start Saving for Retirement Now
  Whether you’re a student, postgraduate, or entry-level employee, it’s never too early to start saving for retirement. Even if retirement is thirty years down the road, saving now could help alleviate stress and anxiety in the long-run. Here’s why you should start saving now for retirement and how to do it.     How Do Retirement Plans Work?   Before we get down to the perks of investing in retirement early, it’s important to understand what a retirement plan is and what options are available. A retirement plan typically incorporates an account you can invest money in annually that will grow over time with compound interest.   Some retirement accounts are referred to as pension plans. This is a fund where an amount of money is added over your working years and oftentimes only accessible once you reach a certain age or threshold. Many government organizations and large companies typically offer this to employees.   The most commonly used retirement accounts are Individual Retirement Accounts typically referred to as IRAs and a 401(k). The best part is that you can invest in both depending on your circumstances!     What is an IRA?   An IRA is a type of retirement account that allows you to input pre-taxed income into bonds, stocks, cash, ETFs, and even mutual funds. These investments grow without tax until you withdraw them when you retire. The account can be opened with any financial institution that’s been approved to do so by the IRS. You’ll typically need to wait until a certain age to actually use funds from this account or you could be charged an early-penalty withdrawal fee. You might also be subject income tax if you withdraw early.   There are a few types of IRAs available including a SEP, ROTH or SIMPLE in addition to the traditional IRA. SEP and SIMPLE IRA accounts are usually used by business owners or someone who is self-employed. A Roth IRA incorporates after-tax contributions and oftentimes will allow tax-free withdrawal in retirement. There is typically a cap on how much you can put into a retirement account yearly.   Ultimately, one of the main perks of investing in an IRA is tax-deferred or tax-free growth. It’s also a way to supplement any savings or even Social Security.     What is a 401(k)?   Like an IRA a 401(k) is another retirement account that allows you to save. These accounts, however, are offered through your employer and allow you to make automatic contributions typically through automatic payroll systems. Like an IRA, your contributions won’t be taxed until you withdraw in retirement, although a Roth 401(k) allows tax-free withdrawal by investing taxed income. Many companies even offer to match your contributions to your 401(k), which essentially gives you free money!     Why Should I Start Saving Now?   Now that you understand your options, here are several reasons why you should start investing now, even if it’s difficult to think about the future.     The Compounding Effect and Compound Interest:   The compounding effect is the idea that if you reinvest your money, you can earn even more money in the long-run. Every year, your investment collects annual interest which can range depending on the account. This is added on top of the initial amount you put in and builds up year after year.   For example, if you invest $10,000 into a retirement account at age 20 with an annual interest rate of 7%, by the time you’re 60, that investment could equal nearly $150,000. If you invest that for a twenty-year period with the same interest rate, you may only get about $39,000 for retirement. So the earlier you start, the more money you can save in the long-run.     Don’t Miss Out on Free Money   If you work for a company that offers to match the amount you put into your 401(k), every year you postpone investing in a 401(k) is money lost. Additionally, the IRS caps the amount you can put into retirement accounts every year. For example, in 2019 and 2020 individuals can put up to $6,000 annually into retirement accounts while those older than 50 can add an additional $1,000. Even if you try to make up for lost time, you lose those past opportunities to invest, you lose the extended compound interest, and you’ll decrease the end value you get in retirement.     Social Security isn’t Enough   Social Security is typically taken out of every U.S. worker’s paycheck. It offers benefits to retirees as well as those with disabilities. Typically, you can’t start receiving Social Security until you’re 62, and while receiving the money is definitely a relief, it’s not enough. According to the Social Security Administration, benefits cover only about 40% of your pre-retirement income. Therefore, if you want to live a comfortable life after retirement, you’ll need an account to supplement it.   It’s often hard to start planning ahead for the end of your career, especially when you’ve just started your first job. But taking the time to prepare now for the future will help you live a more comfortable life in the long-run.         Resources:   https://www.investopedia.com/articles/retirement/07/noexcuses.asp   https://www.marketwatch.com/story/5-reasons-not-to-contribute-to-your-401k-2013-08-05   https://www.kiplinger.com/article/saving/t047-c032-s014-3-great-reasons-why-you-should-start-saving-early.html   https://www.investopedia.com/articles/personal-finance/040315/why-save-retirement-your-20s.asp
The Basics of a 401(k)
A 401(k) plan is a retirement saving account given to you by your employer to divert a portion of their salary into long-term investments. It’s a special type of account funded through pre-tax payroll deductions. The funds in the account can be invested in a number of different stocks, bonds, mutual funds, or other assets, and are not taxed on any capital gains, dividends, or interest until they are withdrawn. A 401(k) is a "qualified" retirement plan. That means it is eligible for special tax benefits under IRS guidelines, meaning the plans may be either defined-contribution or defined-benefit. For more information, you can check out Investopedia’s articles on defined-contribution or defined-benefit plans. The Benefits of a 401(k) retirement plan are (1) tax advantages, (2) employer match programs, (3) investment customization and flexibility, (4) loan and hardship withdrawals, and (5) moving the account to another employer.   Here are some websites to give you more information: The Balance’s “Understanding Your 401(k) Retirement Plan” Investopedia’s “401(k) Plans: The Complete Guide” Investopedia’s “The Basics of a 401(k) Retirement Plan” Nerdwallet’s “What Is a 401(k)?”   You have to decide whether or not you want to participate in the 401k, and how much you will contribute each pay period. If you earn $750 each pay period and elect to defer 5% of your pay, $37.50 is taken out of your pay and placed in the 401k plan. These contributions are deducted from your salary on a pre-tax basis. This means that by contributing to a 401k, you actually lower the amount you pay in current income taxes. For example, instead of being taxed on the full $750 per pay period, you are only taxed on $712.50 ($750 minus your 401k contribution of $37.50 equals $712.50). You don't owe income taxes on the money contributed until you withdraw it from the plan. Salary-deferral plans are generally self-directed. This means you are responsible for deciding how to invest the money that accumulates in your account. Usually, you must choose among a list of investments the plan offers. The advantage of self-direction is that you can select investments that you believe will help you achieve your long-term goals. But, of course, it also means added responsibility for choosing wisely. When you participate in a traditional 401(k) plan, the taxable salary that your employer reports to the IRS is reduced by the amount that you defer to your account. This means income taxes on that money are postponed until you withdraw from your account, usually after you retire. If you participate in a Roth 401(k),  the amount you defer doesn't reduce your taxable income or your current income taxes. But when you withdraw after you retire, the amounts you take out are tax-free, provided you're at least 59½ and your account has been open at least five years . Participating in a 401(k) plan gives you a head start on your long-term financial security. A 401(k) not only provides a mechanism for saving. It also allows the money in your account to compound tax-deferred. That means that the earlier you begin to participate and the more you contribute, the greater chance you’ll have of amassing a substantial retirement account. You can also check out Nerdwallet’s 401(k) Calculator to see how your savings will grow over time. The federal government caps the amount you can contribute to your account each year. See the Annual Contribution Limits Table for current caps, which can change from year to year. You are also responsible for the investment results you achieve, though your employer has the obligation to offer appropriate investment alternatives.   Withdrawal Generally, a 401k participant may begin to withdraw money from his or her plan after reaching the age of 59½ without penalty. The Internal Revenue Code imposes severe restrictions on withdrawals of tax-deferred or Roth contributions while a person remains in service with the company and is under the age of 59½. Any withdrawal that is permitted before the age of 59½ is subject to an excise tax equal to ten percent of the amount distributed (on top of the ordinary income tax that has to be paid), including withdrawals to pay expenses due to a hardship. The Internal Revenue Code generally defines a hardship as any of the following: (1)Unreimbursed medical expenses for the participant, the participant's spouse, or the participant's dependent. (2) Purchase of principal residence for the participant. (3) Payment of college tuition and related educational costs such as room and board for the next 12 months for the participant, the participant's spouse or dependents, or children who are no longer dependents. (4) Payments necessary to prevent foreclosure or eviction from the participant's principal residence. (5) Funeral and burial expenses. (6) Repairs to damage of participant's principal residence. Some employers may disallow one, several, or all of the previous hardship causes. To maintain the tax advantage for income deferred into a 401(k), the law stipulates the restriction that unless an exception applies, money must be kept in the plan or an equivalent tax-deferred plan until the employee reaches 59 years of age.   Due to COVID-19, there have been changes made in 2020. The CARES Act that was signed into law on March 27, allows those affected by the coronavirus pandemic a hardship distribution up to $100,000 without the 10% early distribution penalty those younger than 59½ normally owe. Account owners also have three years to pay the tax owed on withdrawals, instead of owing it in the current year. Note this provision must be adopted by the plan so it's best to check with your plan administrator first. Or, they can repay the withdrawal to a 401(k) or IRA and avoid owing any tax—even if the amount exceeds the annual contribution limit for that type of account.   Resources  https://www.nerdwallet.com/blog/investing/what-is-a-401k/ https://en.wikipedia.org/wiki/401(k) http://www.401khelpcenter.com/401k/how-does-a-401k-work.html#.XsxR7BNKjRY https://www.finra.org/investors/learn-to-invest/types-investments/retirement/401k-investing/401k-basics https://www.investopedia.com/terms/1/401kplan.asp https://www.finra.org/investors/learn-to-invest/types-investments/retirement/401k-investing/annual-contribution-limits