5 Easy Ways Millennials Can Start Investing in Retirement Today

Posted on Posted in Retirement
If you have no idea how to start investing, it’s totally okay. You’re not alone. Upon graduating college and getting my first full-time job, I did not know where to begin either. The important thing is to get started while you’re young and embrace the power of compounding interest.
It turns out that boring math equation you learned in seventh grade is important. No worries, you don’t have to be a mathematician. Basically, your initial investment earns interest on top of the interest it’s already accumulated. Time is your best friend because starting early and investing often could turn into a healthy nest egg by the time you’re set to retire.


The easiest way to get started is to invest in your employer’s retirement plan. This can be a 401(k), 403(b), or 457 plan. They are very similar but a 403(b) and 457 plan are typically used for tax-exempt organizations like government organizations or nonprofits. For the sake of this post, I’m using a 401(k) because it’s the most popular, but know that the information is very similar.
  1. Contributing to your employer’s 401(k) plan

  • “Are you saying I only need $401,000 to retire?” No, you’ll need much more. 401(k) applies to its name in the IRS (Internal Revenue Service) tax code.
  • Your taxable income goes down and gets invested in an employee sponsored retirement account. The contributions you make to your 401(k) are not taxed (for now).
  • Example; you earn a salary of $50,000. If you contribute 10% ($5,000) of your income to your 401(k) then your taxable income is now $45,000.
  • Your money will be subject to taxes when you cash out when retiring.
  • Simple enough? This is awesome because this money is invested in retirement before you ever see it in your bank. It’s like you never had it to begin with! It’s saving money on autopilot.
  • But wait there’s more! Shout out to the OxiClean guy for coining the phrase. RIP.
  • Your employer may offer an employee match up to a certain percentage.
    • This is the only FREE money that exists in investing. If you do one thing, at least put in the contribution that your employer will match.
    • Get with your HR/payroll department and ask them about the match. They may have automatically enrolled you when you started.
    • The IRS set the maximum you can invest in a 401(k) at $18,000 per year BEFORE the company match.
Personally, my employer matches 50% of my contributions up to 4% of my paycheck. So… if I contribute a minimum 8% of my income, then they will match an additional 4% for a grand total of 12%. Not bad, considering this is going to sit in my account untouched for another 35+ years and work that compounding interest. I’ve also heard of employers that match up to 6% so connect with your employer and find out what they match.
If you can afford to contribute more, do it. Your older self will thank you later. I received a raise at the end of last year and decided to up my contribution from 10% to 12%. You can always adjust your contributions as you go along. If you have other priorities that you need to save for, decrease the amount to the minimum company match or if you get a raise or promotion, increase the percentage.
Depending on what funds your employer offers, you can choose where you’d like to invest your money (stocks, bonds, mutual funds, etc.), or play it safe and keep it all cash. This comes with a tradeoff. The safer you play it, the less your money will grow. Keeping it all cash is actually even more risky than investing in stocks or bonds.
Since inflation is typically 3%, that is the amount the economy values your dollar over time, your money needs to at least keep up with inflation to grow. Even in a bad year, stocks historically return at least 6%. Do yourself a favor and trust the market. This is how people build wealth.
I’m not going to get into the nitty gritty of specific retirement companies that offer a 401(k). Just know that you have to stick with what your employer offers. If you’re reading this and thinking, “My employer doesn’t offer a 401(k), I’m screwed.” You aren’t. Which brings us to the second way you can invest.
If your employer doesn’t offer a 401(k), then you have the opportunity to invest in an Individual Retirement Arrangement (IRA). There are a few types of IRA’s and they are much more flexible than a 401(k) as far as investment options and fees.
  1. Contributing to a Roth IRA

  • Unlike a 401(k), your money in a Roth IRA is invested after taxes are deducted from your paycheck.
  • This is a huge advantage, because what you see is what you get. Your money grows tax-free!
  • You can also take out the initial amount invested at any time, but this defeats the purpose of investing in retirement in the first place, so wait for your money to grow.
  • If you have the bandwidth, use both the 401(k) and Roth IRA. Invest the minimum amount in the company 401(k) to get the matching… then put the rest in a Roth IRA.
  • If you switch jobs or careers, many financial institutions offer the option to roll over your 401(k) into a Roth IRA.
  • Typically if you’re young, your income is lower, but if you’re a baller and making $117,000+, boohoo you don’t qualify. This also applies to married couples with a combined income of $184,000 or more. There are options for you so don’t fret.
  • The maximum annual contribution to a Roth IRA is $5,500 if you’re under 50 years old and $6,500 if you’re over 50. The extra $1,000 for people 50+ is a way to help them catch up.
  • If you take out this money before the age of 59½, then you’ll pay a 10% penalty unless you have an exception to the rule. More on that below.
  • Regardless, you have to wait at least 5 years after the initial contribution to withdraw any money.
Now, think of that five-year rule as golden. You can’t break it. Withdrawing money early can penalize you 10% plus the amount of your tax bracket. This could be upwards of 40-60% as you grow your income. What was the point of investing it in the first place if you’re going to penalize yourself?!
However, there are a few exceptions to the rule of taking money out of a Roth IRA before 59½. Roth IRA’s are for retirement, not for savings. If you need to access your money before you grow old, purchasing your first home, investing in higher education like a Master’s degree, or becoming severely disabled are examples of ways to avoid the 10% tax penalty. Life happens. Surprisingly, the IRS understands. On top of the principle (your initial investment), this money can be withdrawn with no taxes in addition to interest gained on your contributions!
Roth IRA’s are very flexible other than that maximum income requirement, the five-year penalty, and age requirement. It’s finance. Can you expect it to be that easy? If your parents are smart or you want to show your kids how much you love them, a Roth IRA has no minimum age limit. Your babies can potentially be light-years ahead of most adults! And if they are fortunate enough to retire early since you set them up with a solid foundation, there are ways to withdraw from your Roth IRA early without being penalized using IRS rule 72t.

 


Since you’re reading this, you’re clearly an over achiever and plan on breaking that $117,000+ income threshold if you haven’t already. You won’t qualify for the Roth IRA so the traditional IRA is the option for you.
  1. Contributing to a Traditional IRA

  • Like a 401(k), your money is invested with pre-tax dollars.
  • If you plan on earning less money during retirement than you currently are, then this a good idea. “How can I plan this?” You don’t know what you don’t know.
  • These typically appeal to higher income individuals who have an idea their income will drop during retirement. You’ll no longer be receiving a steady paycheck during retirement so this is a likely circumstance.
  • Contributions made to a traditional IRA are tax-deductible because you are taxed on gains, interest, and dividends upon retirement.
  • The same maximum annual contributions apply as a Roth IRA. $5,500 for under 50 and $6,500 for 50+.
  • The same 10% penalty applies for taking out money before the age of 59½.
  • At the age of 70½, it’s required to start taking mandatory distributions.
For investors just starting out, all this information can be intimidating. Plus, if you’re anything like me, you’re probably thinking, “Who the hell has the kind of money to max out a 401(k) at $18,000, a Roth IRA at $5,500 and an IRA at an equal $5,500. That’s $29,000 a year for some money I won’t see for a long, long time”. Check out that infographic above and you’ll see why putting more than enough in early will set you up when you’re ready to sip mai tais on the beach.
As a personal finance option for millennials, the traditional IRA does not have all the glamour of the 401(k) and Roth IRA, but nevertheless is good to know about. As you grow older, you advance in your career and this becomes a more appealing avenue.
  1. Contributing to a Roth 401(k)

  • Introduced in 2006, this is relatively new in options for retirement accounts.
  • Works just like a Roth IRA, with your money being taxed now and growing tax-free until retirement.
  • Unlike the Roth IRA, your maximum contributions are not limited to $5,500.
  • Your maximum contributions are up to $18,000 per year, like a regular 401(k).
  • Due to contributions growing tax-free, a Roth 401(k) is a smart decision based on the fact that the government can charge higher tax rates in the future.
  • Similar to a traditional IRA, retirees must take mandatory distributions at the age of 70½.
  • You can’t participate in a Roth 401(k) unless your company offers a traditional 401(k) plan. This is why they aren’t as common.
  • Employers don’t have to offer a Roth 401(k) unless they want to. They typically come with extra costs the employer has to account for.
The Roth 401(k) is like the new kid on the block. It has all the best features of each of the other retirement plans. The maximum $18,000 contribution limits, the ability to grow tax-free, the opportunity to pay lower taxes now. Seems a little too good to be true. The IRS still wins since they get your tax money now to fund the government today.
The big kicker is that your employer does have to offer a Roth 401(k) option to begin with. It’s still relatively new in the tax world since the IRS began during the Civil War so time will tell how the rules change. Happy 10th birthday to the Roth 401(k)!
Now, if you’re about entrepreneurship or work for a smaller company that may not offer a 401(k), then there’s another option for you.
  1. SIMPLE IRA

  • SIMPLE – Savings Investment Match Plan for Employees.
  • Catered toward companies like startups that have 100 employees or less.
  • Employers have the option to either:
    • Contribute a mandatory 2% to employee’s retirement plan.
    • Match up to 3% of employee’s contribution.
  • Simple process for the business owner, but they cannot save as much for retirement for themselves compared to a SEP IRA or Solo 401(k). Stay tuned for a future post on these!
Starting a business is difficult enough without having to worry about employee benefits and who qualifies for what. Every dollar counts in a small business and time is money. This option has a simple (get it?) application process while making sure owners are taking care of their employees.
Now that you know about retirement plans, remember the 5 easiest ways to get started investing in retirement:
  • Contribute to your employer’s 401(k) plan.
    • At least contribute the matching amount. FREE $$.
    • Adjust your contributions according to your goals.
  • Open a Roth IRA account with any financial institution.
    • Investments grow tax-free.
    • (Not recommended) Possible to take out initial investment any time.
  • Look into a Traditional IRA.
    • Single qualifiers with incomes of 117,000+ or married couples with combined income of $184,000+.
    • If you anticipate your income going down in retirement, the tax advantages of the plan will save you money.
  • Ask your employer if they offer a Roth 401(k) option.
    • Combines all the best features of a 401(k), IRA, and Traditional IRA.
    • Since it’s relatively new, employers may not offer it all.
  • Less common, but small businesses may offer SIMPLE IRAs.
    • Good option for entrepreneurs who want to help their employees save for retirement.
    • Not the cheapest option for business owners themselves to save up for retirement.
I hope you enjoyed learning about ways you can save for retirement starting right now. Do not wait on this. The clock is ticking and it’s important to get started immediately! Compounding interest can be your best friend as you strive to reach your financial goals.
Please share this post with anyone you know that can use help saving for retirement. Investing is fun once you learn the information to get started. Keep coming back for more!

5 thoughts on “5 Easy Ways Millennials Can Start Investing in Retirement Today

  1. I wish i had read this a year ago. Luckily I have been contributing to my 401k, but only at a minimal level. And just realized there is a roth option available. Thank you for this

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