5 Things to Know Before You Open Your Retirement Account
When you don’t have a retirement plan available at work, or you work the gig economy, saving for retirement becomes a lot less likely. First, it doesn’t come up (remember, we do not have a healthy societal conversation about saving—just spending). Second, without a company making it easy through a 401(k) or 403(b), saving for retirement just seems complicated.
This ends now. We are talking about individual retirement accounts all week, and we are taking action. If you don’t have a retirement plan available to you, then this is the week to finally get yours opened. But before you sit down to boss your own retirement plan, I want you to have a few things at the ready to make sure you don’t have any hurdles. Note: I am using Vanguard as our sample account, but I also like Schwab and Fidelity.
Know which kind of retirement account: A retirement account is a bucket to throw money into and then invest it to make it grow over time. The most common buckets outside of work retirement plans are Individual Retirement Accounts (IRAs) or Roth Individual Retirement Accounts (Roth IRAs). Most young people would benefit from the tax advantages of the Roth IRA, so we will be focused on teaching people to set that one up. Do note that our directions and newsletter tutorials would work for both. Give this nerdwallet piece a quick read to learn how these retirement savings buckets work.
Earned income. You have to earn income to start one. More precisely you have to have earned income the government knows about via the taxes you pay on that money. If you babysit on the side and don’t pay taxes (ahem) then you can’t save into a retirement account.
$100. All you need is $100 to start a Vanguard Roth IRA. Now this very link says you need $1,000, but that is the minimum to invest the money after you put it in the bucket. Not a problem. When you get to $1,000 balance in the Roth, then you can start investing at that point.
Your bank account routing number and account number. How cool is this? You will be able to link your account and automate your contributions to the account, simulating exactly what a company retirement plan would be doing! This makes ALL the difference. To open the account and set up the automation make sure you have your checking account number and bank routing number.
Pick your investment strategy so you don’t end up with money staying in cash! A lot of young people choose to invest in target date retirement funds in their Roth IRAs. I offer them in our investment menus in the company retirement plans my company manages, and most people opt into them. They allow you to find the year closest to when you turn 65 (most retirement age targets) and then the target date fund manages the investments from there in a very inexpensive way. Please read something quick about these before you start because you don’t want to get part-way through the process and then get hung up on investments. Women, especially, are intimidated by investments. If that is you, then please read my book, especially the chapter on women and investing, where I give you all the research that proves women have a better investing track record. Yes, you read that correctly.
Be sure to sign up for my newsletter at LadysplainingMoney.com. Stephanie Matthews and I are doing a subscriber-only video tutorial walking through her setting up an account.
Photo by Diane Helentjaris via Unsplash