Dear Wealth-Building Family Member, In case this is your first visit here, Thank you for visiting the Rich Mom Poor Kid Blog. I’m a mother dedicated to teaching financial literacy to my daughter (aka Poor Kid) and others age 30 and under. Today, I am focusing on a question asked by Poor Kid: What is the best retirement account?
Poor Kid recently started a new job. Since she has been reading the Rich Mom Poor Kid blog, she has been more focused on her personal finances. So, when she received her first paycheck, she asked me about the best way to save for retirement. I was so excited to hear that she was interested in starting early to save for her retirement, because it’s a step that everyone should take in their twenties.
Why Start Early To Save for Retirement? (Know this before thinking about what is the best retirement account.)
You must start now to take care of the future you. I can’t emphasize this enough, especially when it comes to retirement.
Yes, at this point the government contributes to people’s retirement via Social Security. But, there are two things that you should keep in mind when thinking about Social Security.
- First, there is one thing that is not pointed out enough to young people: Social Security is not designed to to cover the full cost of your retirement. Instead, it will likely cover 30 to 40% of your pre-retirement income.
- Second, even the 30-40% that Social Security is currently forecasted to contribute to people’s retirement is not something that people should count on. While there are differing opinions on whether Social Security will run out of money, I am not an advocate of relying upon the government when it comes to planning for one’s retirement.
Other Reasons to Start Early to Save for Retirement
There are other reasons to start as young as possible to save for your retirement.
- One reason: Usually in people’s early adult years they have fewer responsibilities. Often there are no children and/or no mortgages. This means that you can save and invest more aggressively.
- Another reason that you should start saving for retirement as early as possible is that the sooner that you start saving and investing, the longer time your money will have to grow.
So, hopefully by now, you are convinced of the importance of starting your retirement savings and investing as soon as possible. With that in mind, back to the original question…
What is the best retirement account?
When asked this question, my main answer is the Roth IRAs. With these accounts, you can save your way to being a tax-free millionaire in your retirement. How? Well, if you are qualified to contribute to a Roth IRA, you get to contribute after-tax money to the account and then grow your money without ever paying any taxes on that growth and any money that you take out during your retirement. This is powerful, because taxes are one of the main things that slows the growth of your wealth. So, finding a way to pay less taxes speeds the growth of your wealth.
What Do I Need To Know About Roth IRAs Before Opening an Account?
- First, you need to know if you qualify for contributing to a Roth IRA for a given year, and if yes, how much you are eligible to contribute. The maximum that anyone is eligible to contribute to for the year 2023 is $6,500. But, check for each calendar year, because the amount of money that you can contribute changes.
- You need to know your options for where to open the Roth IRA account. Some places that I like are Charles Schwab and Fidelity. You need to know what each place offers. For instance, I like that in Fidelity, you can buy certificates of deposit in your investment accounts.
- You need to know your plan for contributing. For instance, if you want to contribute an equal amount each month, you can contribute $541.66 each month. Or, if you want to contribute the full amount as early as possible in the year, you can put in as much as possible each paycheck, starting in January each year.
- Whatever schedule that you plan for your contributions, keep in mind that you cannot contribute any more money than you have earned so far for the year.
What Do I Need To Do After I Open My Roth Account?
- The one big mistake that I have heard about with regards to Roth IRAs (other than not starting one) is people putting money into their Roth IRA accounts, but not actually investing the money. Once you put the money into the account, you have to do something with the Roth money. For instance, if you put $500 into the account, you need to invest the money. For instance, Poor Kid is investing the majority of her Roth IRA money into an index fund. Another choice could be to buy individual stocks or even certificates of deposit.
- Also, be sure to designate a beneficiary on your Roth IRA account (and any other accounts that you have.)
So, there you have it. I think that the Roth retirement account is the best retirement account…maybe the best investment account…period!
Key Takeaways About The Best Retirement Accounts: Roth IRAs
- You are responsible for taking care of yourself in retirement. Social Security is only designed to take care of up to 40% of your pre-retirement expenses.
- You should start today to take care of you in your retirement. .
- One of the best retirement accounts to start is the Roth IRA.
- Roth IRA contributions are put in after tax.
- Income earned on Roth IRA investments grows tax-free if left in the required amount of time.
Do you have a Roth IRA yet? Let me know!
And don’t forget to subscribe to the Rich Mom Poor Kid Blog, in order to continue to build your financial literacy!
Hugs and Best Wishes That You Become a Roth IRA Millionaire,
Rich Mom
Who is Rich Mom?
If you are wondering who Rich Mom is, check out my “About Rich Mom” page.
Also, please note: I am not an investment advisor. Always do your own due diligence and research before investing. Check with your own investment advisor.
Also, remember that past performance is not a guarantee of future performance.
The information shared here is not intended as financial advice, just entertainment and encouragement.
Excellent post! I learned so much.
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