Investing for retirement is one of the best things you could do for yourself.
Social Security isn’t enough, especially with the rate of inflation, to sustain anything outside of barely surviving and scraping by.
Investing for retirement is not only a must, but it’s easier than it’s ever been. I’m not leading you into a funnel here, I’m saying that you have more options and more access to hard-hitting financial data (thanks to the internet) than anyone ever has before in their lives.
If the internet existed in 1929, we might not have had the Great Depression. We could have seen some more of it coming.
The point is: investing is a long-term solution for short-term problems. Invest now and let it sit there, and all the short-term problems you will run into later in life (buying groceries, repairing the roof, buying new tires because you got a flat) will be taken care of thanks to sustainable, structured income through your retirement accounts.
- 1 Types of Retirement Plans You Should Know About
- 2 What About Savings?
- 3 Is Real Estate Safer Than the Stock Market?
- 4 Is a 401(k) Worth Looking Into?
- 5 Why Traditional Savings Won’t be Enough
- 6 How do You Withdraw from a Retirement Account?
- 7 Can You Borrow from a Retirement Account?
- 8 Always be Prepared
Types of Retirement Plans You Should Know About
Now it’s time to go over the most common forms of retirement plans, with some honorable mentions.
Saving money alone isn’t enough for retirement; you have to keep inflation rates in mind for that. Having an interest through these retirement plans, whether through real estate appreciation or an interest rate, is going to pay off in the future.
Rollover vs. Traditional IRA Accounts
Rollover accounts are usually 401(k)s, which we’ll talk about in a minute. Basically, you just have a retirement plan that will be taxed when you cash out.
But an IRA account is a savings method that usually contains compound interest, which is what you want. IRA accounts are taxed when you cash out at retirement, but a rollover IRA could be beneficial to you if you’re transferring assets.
A rollover IRA turns previous retirement accounts, like that 401(k) I mentioned, and rolls it into an IRA. This means that it takes on the interest rate of the IRA, and that you transfer all funds from that previous account. You cannot add to a rollover IRA; it just runs for the remainder of the term.
Rollovers can be good if your 401(k) plan is falling through, or your employer stops offering a match program. However, a traditional IRA account can be added to, allowing you to grow compound interest. A traditional IRA account will still be taxed at cashout, but a Roth IRA is a tax-free solution.
Real Estate vs. Stocks
Both have risks, but both can make you a lot of money while providing excellent security.
You can get into index stocks, individual stocks, municipal bonds, and you should get into all of those—let it run wild. It’s called having a diverse portfolio, and any self-respecting investor will have a diverse portfolio instead of putting all of their eggs into one basket.
The thing is, if you invest in stocks, there’s going to be this little fear creeping in the back of your head saying “What if the market collapses?”
Let it. You’re not putting all of your grocery money, rent money, and living expense money into a portfolio. This is a long-term strategy, and the market will always bounce back, at least to some extent.
Hold onto it, and when the curve comes around, you’ll still have dividend yields coming through the whole time, and an increased share price based on the way we come back from mini-recessions and financial issues.
But what about real estate? Real estate has only ever appreciated in value, even if you don’t realize it.
A two-bed, one bath home that sells for $100,000 can be flipped for $125,000 with some basic reno and landscaping that costs you under $10,000. That’s a tight profit.
If only it were that simple, you know? Real estate can often get more involved than the stock market, although it can be less complex. You just spend more time on it.
Real estate is worth it if you’re investing and bringing in an income through tenants. You can purchase homes, strip malls, or whatever land developments you want, so long as you can make a cash flow appear after you rent it out to tenants.
Real estate has a decent science behind it to get homes in up-and-coming areas or stick to the outskirts of major city areas, and you will see a ripple effect in a wave across these neighborhoods that spike the value (sometimes by six figures).
Both require diligence and patience, for sure, and both can be beneficial. You just have to be careful and make calculated decisions.
401(k) vs. 403(b)
We’ve all heard about the famous 401(k), but most people never hear about 403(b) accounts, which could be beneficial depending on the person.
You control your 401(k) account, but your employer controls your 403(b). The latter account types are primarily utilized by churches and nonprofit organizations, so it’s very specific if it will apply to you since it is a tax-deferred account.
403(b) accounts run into the same deposit restrictions as 401(k) accounts, although when you hit a certain amount, you may lose tax difference.
The reason that people don’t talk about 403(b) accounts is that they’re very niche, and not many of us fit into that category, but it’s important to see if you do fit into the requirements.
A 401(k) works similarly enough that it’s still a fantastic way to invest for retirement.
Your 401(k) account should have employer matching, which means that whatever amount you put into your account, your employer will match up to a certain amount. That means that depending on how much you’re allowed to deposit each year, you will be able to get free money.
Yeah, it’s basically free money. If you can put in $16,000 per year into your 401(k), then your employer may match that up to $16,000, meaning you’ll get $32,000 per year.
Over a decade, they’re giving you $160,000—and I left out the best part of both your contributions and theirs, but they’re tax-free.
All of this money is pre-taxed, and while you will pay taxes upon withdrawing this money, even at the maturity age of 59½, it will have matured with interest, and accounting for inflation, to yield a profit. If you can invest in a 401(k), you should.
What About Savings?
You should absolutely save your money, and you should have liquid assets in case of emergencies. You should definitely have cash ready to put out the fires that happen in our everyday lives.
However, you shouldn’t have cash just laying around. Your money could be making you money, so if you have a savings or an emergency fund, plan it accordingly.
If you have multiple mortgages through real estate investments, account for those tenant payments disappearing for a year and you carrying the burden out of pocket. If you have a dividend yield that you could on all the time, pretend it doesn’t exist.
Make a one-year savings account (preferably in a high yield interest savings account) that will make you money and have quick 1-2 day access available to help you out. That way, you can still make a little bit of money while everything outside of your one-year emergency fund will be invested, and working for you.
Is Real Estate Safer Than the Stock Market?
Real estate is often considered safer than individual stocks through the DOW, or the stock market as we know it today.
Real estate has only increased in value over time, but the stock could tank overnight if a company fails (and despite having access to financial reports as a stockholder, you still won’t see it coming).
If you take care of your property, it will be worth more in the future. It’s a safer investment method with a lower risk, but remember that no investment is truly 100% risk-free. Things can always happen, you just want the bare minimum amount of risk possible.
If you were lucky enough to invest in Apple or Google, you might think differently towards stocks. Stocks can be done effectively with a relatively low-risk if you have a diverse portfolio, but the effort that goes into that can take years to master.
There’s also something you should be aware of if you plan on going with the stock market, and that’s market predictions.
Nobody can predict the market. Warren Buffet can’t predict the market.
There’s no golden time to buy in, only hindsight of “I wish I bought this stock then,” but then you get stuck on this feedback loop of being upset and psychologically compromised with stocks. Then you think, “Well, this investment could be the next Uber or GoPro.”
It’s easier to get emotionally tied-up and greedy with stocks than it is with real estate.
Your stocks are numbers on a screen or a phone call with your broker; your real estate is something you can touch, something you have to renovate, something you can actually see in front of you in its tangible form.
Is a 401(k) Worth Looking Into?
A 401(k) is worth looking into if you have an employment match program.
This means that your employers match the money you put into your 491(k)—up to a certain amount—on a monthly basis, or sometimes semiannual basis.
A 401(k) match program is free money. There’s no way you can look at it from a different angle—you’re being paid to pay yourself, and you get interest on it. Lower your cost of living, find a way to contribute to your 401(k), and get that employment match.
Make sure that your employers are matching that and depositing it. You are the one in control of your 401(k); not them. There’s a lot of forms to sign in order to allow an authorized deposit on your 401(k), which you can iron out with your employer.
These types of accounts are definitely good to get into, however, they’re not as good as a Roth IRA because there is no compound interest. If you have the option, you should invest in a 401(k) with employer matching, and a Roth IRA at the same time.
Why Traditional Savings Won’t be Enough
Even if you get a high yield interest savings account, even if it has a 1.8% to 2.1% return, and you’re storing six figures in there, it’s not a retirement account. It’s just not the same thing.
Now, I’m not saying it’s not smart to do this. If you’re sitting on money that you’re trying to invest in an intelligent manner, it better be in a high yield interest savings account.
If you have enough money to invest, let’s say $100,000, that could be $116,949 in five years at a 1.8% interest rate, or nearly a $17K profit just by letting it sit there.
17 grand. For basically doing nothing.
That’s smart, but if you did this six times over and kept reinvesting, you’re only going to come up with about $104K profit by the end of a thirty-year term. That’s not enough. It’s good, but not enough.
If you invest in a Roth IRA with compound interest over a long period of time, you could literally see a 500% return on your initial investment.
The other problem with traditional savings as a means of retirement is that you’re expected to add a minimum of $100 per month to most high yield interest savings accounts to continue accruing interest.
How do You Withdraw from a Retirement Account?
Everything is done online now.
You can access your Roth IRA, 401(k), or another retirement plan online in most scenarios. It’s rare to have to physically go into your bank location to access it.
You can go to the page with your account, log into your account, and click on your retirement account. Most banks and financial institutions will give you the option to choose how you want to receive your money.
This could be a check in the mail, ACH bank transfer, or a myriad of other ways offered by your institution.
The difficult part, or should I say, the aggravating part, is specifying your tax withholding status. You’ll have to then sell your specific securities in order to complete the transaction.
At this point, you will be finalizing the transaction. The money is going to come out to wherever you said you want it, your securities will be gone, and this process is irreversible.
I strongly recommend that you don’t remove money from your retirement fund for any reason. You should be saving that money in a savings account to get the highest possible yield.
Can You Borrow from a Retirement Account?
You absolutely can borrow from a retirement account, in a way. Let’s start out by talking about withdrawals.
You’re withdrawing money from your account, which can cause problems.
Some Roth IRA plans might cost you a 10% fee just for taking money out, plus you are taxed on that money the second you take it out. It’s part of your income, so you need to pay subsequent taxes on it accordingly.
I just want to clarify that some Roth IRAs might do this, but it’s not a general rule. Most Roth IRAs are actually going to give you no penalty whatsoever for withdrawing money from your account, it will just lower your compound interest, which defeats the purpose of having a Roth IRA in the first place.
When you withdraw from a Roth IRA early, it can be taxable. If you let it run until you’re 59½ like you’re supposed to, it’s tax-free.
However, you can take out a loan from your retirement account, which acts completely differently. Loans need to be paid back in a timely fashion, just like any other loan, to avoid it counting as a taxable event.
If you don’t pay the loan back, your funds inside of the account will still remain intact, but that money that you took out will be taxed.
That means that come tax time, you’re tax liable—you have to pay the amount of taxes on that as if it were capital gains.
Always be Prepared
Regardless of which investment method you decide to run with, you stand with something to gain so long as you diversify your portfolio.
Investing now, with some knowledge on the market and figuring out which methods work best for you, is going to pay off in the not-so-distant future. Retirement is coming, and it demands preparedness.
Ready your personal finances now, diversify your money into multiple funds in the event that one fails, you will still have others to rely on, and you’ll be set for a solid future.