The first thing that stops people from actually saving for retirement is that they just don’t understand how any of it works. Once you break things down and start researching to make yourself a simple, understandable, doable plan it will make more sense and become more realistic. So, how to get started building a retirement plan? First you need to do some research so you can understand what types of accounts you want to build into your plan.
There are two main types of accounts that people use most often401k and IRAs. The 401k account is done through your employer. An IRA is an independent retirement account, and you set that account up on your own. There are advantages and disadvantages to both accounts, and they are similar in many ways. Some people decide they only need one of these accounts, while others have both. What you do is all up to you and what you are trying to accomplish with your savings plan and your individual needs.
To begin with, these accounts are similar in that the money you save into these accounts is then invested into stocks, bonds, money market accounts, and other investment options that you’ve chosen. This earns you returns, so the fifty dollars you save now will earn you a lot more over the years between now and retirement. This helps you build up your savings, and helps you beat inflation.
It is for this reason, among others, that it is extremely important that you start saving for retirement as soon as possible-there is no such thing as starting to save too soon. The fifty dollars you save now will earn you more each year, so it will have more time to build and invest than it will if you go to save that money years from now. It’s also good to start making saving for retirement a habit now, because there’s always a good excuse for putting it off. Saving even one percent of your income is a great
A key difference between these options is the amount of control you have over your account. A 401k is through your employer, and while you own your account and can take it with you to another employer when you leave your current employer, they do set up a couple of different investment packages for you to choose from. With an independent retirement account you can choose any investments that you like at all.
Another difference between these accounts is the maximum contribution limit . This changes every year and is set by the government for both account types, but is much lower for an independent retirement account than it is for a 401k. For this reason, among others, many people choose to split up their contributions between both of these types of accounts. Another reason to have both is to diversify your investments.
While there is always more to know, understanding the differences and similarities, and what 401k and IRA s are exactly, can really help you get started on deciding what is right for you and what you want to build into your retirement plan. If you decide you might want to start a second account later, it’s perfectly fine to just get started saving in one account right now, and start something else later. The most important thing is to start saving, even a small amount, and building up towards the future.