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The idea of simply saving for retirement may be wrong, says self-made millionaire Vivian Tu.Rich AF: A winning money mindset that will change your life.” will be released in December.
“Don’t save for retirement,” she tells CNBC Make It. Instead, “invest for retirement.”
On average, Americans in their 20s believe they need about $1.2 million to retire comfortably, according to Northwestern Mutual.2023 Plans and Progress Survey. ”
But if you stash your money away in a traditional savings account, you probably won’t have enough money saved up by the time you reach retirement age because your money won’t grow fast enough.
However, retirement investment accounts can typically earn a much higher rate of return than traditional savings accounts, meaning your money will grow faster when the interest is compounded.
According to CNBC’s calculations, let’s say you start saving at age 21. If you contribute $100 a month to a retirement investment account with a 7% annual interest rate, you’ll have saved nearly $354,600 by age 65.
On the other hand, if you put that money in a traditional savings account, you’ll typically earn less than 1%. FDIC data. CNBC calculates that if you put the same $100 into a savings account, you’d only have about $66,300 by the time you turn 65.
It is important to note that many things can affect your retirement portfolio, and these calculations do not take into account unpredictable factors such as market volatility, unemployment spells or promotions. is.
If you want to start investing for retirement, there are many options.
One way to start is with your employer’s 401(k) plan (if available). This will automatically deduct your contributions from your pre-tax paycheck, lowering your taxable income for the year. If you follow all withdrawal rules, these contributions can grow tax-free since you won’t owe taxes until you withdraw the money in retirement.
Your employer may also often offer to match your contributions up to a certain percentage, which can help you reach your retirement goals faster.
Another option is a Roth individual retirement account. Unlike an employer-sponsored 401(k), anyone within certain income limits can open a Roth IRA on their own through a brokerage firm.
You can contribute money to this type of account that you have already paid taxes on. This means you can take tax-free withdrawals even after you turn 59 1/2, as long as the account has been open for at least five years.
After all, wise investments can help your money grow exponentially even after you quit your job.
“You need to invest before you retire because you only have a limited time in your life to work, and money works for you throughout that time,” Tu says. “It’s like having a little employee working just as hard behind you.”
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check out: How much does an American in his 20s need to save each month to retire with $1.2 million at age 60?
