Cash Course: Understanding Retirement Savings Accounts

$500 just enough to buy those limited edition sneakers now let me ask you would you rather have $500 now or $35,000 later $35,000 later obviously what's the catch the catch is putting that $500 into a retirement savings account and investing the Money Retirement that's like a million years away oh I remember when I used to think like that let's just say those 40 years went by real fast so you're saying I shouldn't buy these limited edition sneakers what I'm saying is before you do watch this episode of people work for most of their lives but you can't work forever once they retire they don't usually have a paycheck coming in and they depend on their savings or other Investments like real estate however the average American household only has about $65,000 in retirement savings with the typical retirement age being 65 and an average life expectancy of 77 years that's not enough money to live on for a retirement that could last a decade or more oh no so the sooner you start working on your savings or Investments for retirement the more comfortable you'll be financially when that time comes so what kind of retirement savings accounts are there there are three main ones each with its own benefits and drawbacks first is of 401k this is an employer sponsored retirement plan that an employer sets up this plan allows for an employee to invest a portion of their income before it's taxed also called pre-tax income the main benefit is that contributions to this plan will reduce your taxable income for the year you contribute additionally many employers offer a match program where they will match an employees contribution to their 401K up to a certain limit so if a company offers to match the first $5,000 and you can contribute $5,000 you've doubled your investment yes free money yep but 401ks also have a few drawbacks while the Money Paid in isn't taxed the money you withdraw when you retire will be taxed as regular income also you typically can't withdraw from it before your 592 without paying a 10% penalty in addition to the taxes another drawback is since the business manages the plan they typically have higher administrative fees than other investment accounts and limited option and limited say in where your money is invested well what if I wanted to manage the investment myself well in that case you're going to want to open an IRA that's short for individual retirement account to which money is also contributed pre-tax and then tax when you withdraw from it but unlike a 401k an IRA is set up by you instead of your employer and you generally have more investment options the downside is there is no employer match and the limit you can contribute taxfree is significantly lower than a 401k there is also a Roth IRA which is an account you can set up manage and make post tax contributions to there is no tax deduction on the money going in but when you pull your money out you won't pay tax on the growth of your Investments so it's either taxfree on the way in or the way out exactly now where to invest your retirement savings is a whole different ball game have you heard of Roi well that stands for return on investment yes it's basically what you gain on the money you invest you'll want to put your money where you'll receive the highest Roi this includes factoring in the rate of inflation which is when money loses value over time and buys less than it did before this means that you'll have to find Investments that not only have a positive Roi but also beat the inflation rate so what's the best place to invest my money well if that were such an easy question I would have retired much earlier well what's best will change depending on how far you are from retirement when you're young you might choose more aggressive Investments with a higher potential return and higher risk as you get older you might switch to safer Investments with lower rates of return and lower risk great how do I get started first become knowledgeable understand the different kinds of investment accounts and research the various available Investments each account and investment type comes with its own risk and reward second see an example talk to people you know about retirement planning and discuss any questions you may have third start budgeting take a percentage of what you earn and save it and invest it for the day you want to retire the earlier you start the bigger your money will grow most accounts offer automatic deposits making it super convenient to contribute saving for retirement is so simple yet so few young people do it retirement may feel like an eternity away but the sooner you start investing the more time your money has to grow well it's time to go the beach is calling me wait what did you invest in stocks bonds well that's another [Music] episode watch more at prer kids.com and parents don't forget to subscribe