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One day, we all want to retire. After working for most of our lives, we imagine a time when we can stop working and have choice in how we spend our time. Because we're all living longer than ever before, it's going to take even more money to support our retirement. The secret to a financially secure retirement is to start saving now.
Let's meet two retirees to make our first point.
This is Simon. He and his wife worked hard to support their family and now they're retired. They're happy, but feel insecure about money. An unexpected expense could put them in debt. To help, Simon has a part time job at a hardware store. He'd prefer to be fishing or playing with his grandkids, but he doesn't have a choice.
Next, let's meet Caroline. Like Simon, she and her husband worked to support their family and now they're retired. They live a relatively carefree life. They travel, spend a lot of time with family and don't worry too much about money.
Both Simon and Caroline have a long life ahead of them, but Caroline and her husband learned early in life that saving a little bit of money over a long time can make sure they retire comfortably. This wasn't the case for Simon and his wife. They started saving too late.
To retire like Caroline, the first step is understanding how to save for retirement. The basic idea is to start saving now and save as much as possible over a long term.
To start, you'll need a place to save it. It's usually called a retirement account and two examples are 401ks and IRAs. Many employers offer a 401K program or you can open an IRA yourself. Once you have an account, you add a little bit of your income to it on a regular basis so the money you contribute over the years, plus what it earns, creates a fund that's ready to support your retirement. These accounts are meant for a lifetime of savings, so don't plan on touching it until retirement.
To get an account started, you'll work with a representative to decide on an amount that you can contribute to the account with each paycheck. This way, you don't have to think about it - your retirement account grows automatically as long as you have income. And some employers even offer to contribute to your account too. That's free retirement money that will buy a lot of maitais. And remember you have to pay tax on your income. By contributing part of your income to a retirement account, there's less income that's taxable with each paycheck.
The money in these accounts is usually invested in the stock market like a normal investment, but retirement accounts are different. Here's why.
When you invest in stocks normally, they hopefully grow in value. Each year, you have to pay taxes on the money as it grows. That's tax money that could be making you more money. Retirement accounts are designed to protect you from having to pay taxes on your money as it grows year after year. This way, your money can grow faster over the long term. Of course, you'll still have to pay taxes, but most retirement accounts make it possible to delay paying taxes until you withdraw the money. But even considering these taxes, you've been able to build a fund that will support a long and comfortable retirement.
The best thing you can do is start a retirement account as early as possible and contribute as much as you can to your account.
What it teaches
This video teaches the basic ideas behind retirement accounts.
- Why saving now matters in the future
- How 401ks and IRAs grow over time
- How these accounts are different from normal investments
- The tax benefits of using a retirement account
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