Of all the things you can do with money—spend it on a winter escape to the Caribbean, swim around in it like Scrooge McDuck—putting some of it aside for the future may not be the most fun. But if you want to spend any of your life not working, and actually enjoy it, you’ve got to start investing. Think of it as a gift for your future self.
And the sooner you start, the better, thanks to compounding (e.g. when your interest earns interest). Here’s an example: Say you have an account with $1,000, add $400 a month and earn 7 percent average annual interest. If you start at 25 and keep it up until you’re 65, you’ll have almost $975,000. But push it off until 35, and you’ll have about $460,000—that’s less than half.
Getting in the habit of setting money aside today also cements healthy behavior you can build on over time. “Starting early, even if it’s just a little bit, puts someone on the right path,” says David Blanchett, head of retirement research at Morningstar Investment Management.
So how do you get started?
First check with your employer to find out what accounts it sponsors, if any. Common options are 401(k) plans for employees of private companies, 403(b) plans for public-school and some non-profit workers, and 457 plans, which are primarily for government workers. Each of these plans allow you to invest up to $18,000 a year—$24,000 if you’re 50 or older—and the savings are tax-deferred, meaning you don’t owe taxes until you take the money out later.
If your employer doesn’t offer a sponsored plan? You can open an Individual Retirement Account, or IRA, and contribute up to $5,500 this year if you’re under 50 (plus another $1,000 if you’re older).
Bonus: Many large employers will match a portion of your savings, which means you’re basically getting paid to save. Even if you can’t max out your contributions to the extent of the IRS rules, try to take advantage of the full match available to you as that money can make a big difference in your overall savings rate. (And it’s free!)
Blanchett and other advisors recommend aiming to put the equivalent of about 10 to 15 percent of your income into your account each year, including employer matches.
Many people look to IRAs when there’s no retirement plan sponsored by their employer—but you can open one in addition to your 401(k), too. You can set it up through many banks, brokerages like Scottrade or Charles Schwab, or financial services giants like Fidelity or Vanguard, and invest your money in mutual funds, ETFs, CDs or even individual stocks and bonds.
There are two types of IRAs: traditional and Roth. With a traditional IRA, the money you invest isn’t taxed until you withdraw it, much like a 401(k). With a Roth—which is available to those who satisfy income requirements—you contribute post-tax dollars, but the money you take out later is tax-free.
Since these plans are meant for retirement, you’ll typically be charged a 10 percent penalty on withdrawals made before age 59 ½ (except in the case of 457 plans). But, depending on your account, that fee could be waived if the withdrawal is used for higher education, buying a first home, or for hardships, such as qualifying medical expenses.
To save money for shorter-term goals, you can open a regular brokerage account, available from many of the same companies that offer IRAs (and from Acorns too, of course). While this won’t help you lower your tax bill, there are fewer restrictions on how and when you can access your cash. For instance, you can use this account to save money for goals that may be a few years out, like buying a home. (Just keep in mind that stock prices can fluctuate, so you want to have enough time to ride out any dips.)
When opening any account, pay attention to maintenance fees, as well as the expense ratio on the funds you choose. Fees can take a big bite out of your money if you aren’t paying attention. SigFig and FeeX are good resources for helping you analyze your portfolio and how much you’re paying in fees.
In the end, remember that saving for retirement, or other long-term goals, is a marathon, not a sprint. Take the time to pick the right account for you, save smartly and consistently—so you can finish strong.
February 8, 2016