Many people do not plan for retirement properly. Moreover, many people are worried that they may not be able to retire. Let’s start with the basics in this article. Compound interest is king when it comes to saving for retirement. You want to invest in things that are going to accrue interest over time such as stocks and bonds. That’s not all though, and before we go any further it’s important you understand the power of compound interest. It’s the reason investing in the stock market is a good plan for retirement. 

Invest in your employer’s retirement plan

The simplest way to plan for retirement is to invest in your company’s retirement plan. This usually comes in the form of a 401k or a pension. Pensions are becoming rarer and usually involve working for the state. Most employers offer a retirement plan that involves you contributing to a 401k. Employers will sometimes match your contribution up to a certain percentage, which is free money that you can add in your plan for retirement. It is easy to put your money into a 401k as your employer can automatically deduct your contribution from your paycheck. You will contribute pre-taxed dollars up to 19,500 dollars a year.

If you can, try to contribute as much of that maximum amount every year. Each dollar that you invest sooner gains even more interest over the coming years. Your eligibility for a 401k will also not be limited by your income. However, that money will be taxed as normal income when you pull it out for retirement. Save for retirement often and make sure your employer will match your contribution.

A pension, on the other hand, is somewhat like a 401k only because your employer pays into the fund as well. Except, what you will be given for retirement will be determined by the rate of pay you made and how long you worked at a job. Your employer will take a mandatory percentage out of your paycheck and invest it in stocks, bonds, and mutual funds on your behalf. As The Street points out, a pension will be determined by three factors:

• Employee’s years of service at a specific company or organization.
• The employee’s age.
• The employee’s annual compensation.

Unlike 401ks, you will not be in control of what you invest in. Your employer will do that for you. There are also certain measures such as “vesting” which require you to work a certain amount of years before you are able to make choices on pension plans and pension benefits. If you have access to either option, invest as much as you can up to the max amount so you won’t wonder if your investment will last. 

Open up an individual IRA

IRAs come in two different types. You have either a traditional IRA or Roth IRA. Both have differences in tax deductions and contribution rules. You can open an IRA through a Robo-advisor such as Betterment or other stock apps. A Robo-advisor is a computer program that invests your money in stocks and bonds. It automatically diversifies your investment portfolio so that you do not have your money tied up all in one investment. Essentially, you deposit the money and watch the Robo-advisor grow your investment over time. If you want to have a personal touch and need help navigating the space it will be in your best interest to meet with a financial advisor. You will be in control of stocks you invest in an IRA and if you have a specific plan, you and your financial advisor can enact it. 

To put it into simple terms, here are the differences and similarities between a traditional IRA and a Roth IRA:

Traditional IRA

• Can contribute up to $6,000 a year, $7,000 if you are over 50.
• Individual control of your own portfolio (not related to your employer)
• When you contribute pre-tax money it lowers your taxable income.  However, you have to pay taxes on it, as if it is income from a job when you pull it out for retirement. 
• If you withdraw early, you are hit with a 10% penalty tax.

Roth IRA

• Can contribute up to $6,000 a year, $7,000 if you are over 50.
• Individual control of your own portfolio (not related to your employer)
• Contribute after-tax money, but withdraws for retirement are tax-free
• You can withdraw your contributions at any time

The optimal position to be in is to have an employer 401k to invest in that is matched and to have an IRA account open. Plan for retirement by gaining compound interest on both accounts and building multiple streams of wealth. This will take time to happen and the sooner you start the better. Don’t pull out money unless you absolutely have to as that tax penalty takes a significant portion of your money.

Generate passive income

A great way to prepare for retirement is to generate passive income. Passive income does not require you to work for each chance that you get paid. For example, let’s say you develop a premium app and charge $2.99 for it. Other than the up-front cost of designing the app and paying for software, you will continue to make money. The process of making money will have been automated and will require little to no work from you. You can plan for retirement by generating several streams of passive income. This will allow you to either live off that income and investments or invest that money into something else. Passive income is taxed and depends on how you earn that money, whether it be from stocks, real estate, or Youtube videos. 

Passive income helps you in the following ways:

• Create cash flow
• Save for other unseen expenses in retirement such as medical or home health bills
• Allows you to pursue artistic dreams or go back to higher education
• Literally, anything you can think of because it is more money

This step can wait until after you retire. However, if you start coming up with ways to create passive income now, you can funnel that money into your investments.You can invest money into a rental property or start a new business after retiring. With this extra income, you can plan for retirement to start earlier or you could have a lot more money saved up. Combine all of these measures and you’re well on your way to completing your plan for retirement.

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