I’ve talked about invisible scripts before. They’re the things we tell ourselves that are so deeply embedded that we don’t even realize they guide our attitudes and behaviors.
For example:
- “I need to go to college to get a degree if I want a good job.”
- “After I graduate, I need to get married and settle down.”
- “Having more Twitter followers means more people like me.”
And early retirement is no exception.
Our society has mistakenly idolized the idea of retiring. So much so that people are willing to slave away for decades at a job they don’t enjoy with the singular goal of living ultra-frugally so they can retire in their 30s.
Take a look at this thread on a subreddit dedicated to early retirement. The original poster posits a provocative question: Do you all hate your jobs?
And the answers were equal parts interesting and sad.
- “I really enjoy the work that I do and the people that I work with. I just don’t want to have to do it 40hrs/wk and I don’t want to have to depend on doing it to get by financially.”
- “It’s not my job itself that I dislike. I dislike the general structure and rigidness of corporate work life.”
- “I don’t hate my job, but it is very, very boring. What’s worse is that I accidentally got too good at it, which means I’ve been put in the position of managing other people, and that part of the job I do not care for at all.”
If you dislike your job, I have one question for you: Why aren’t you working to enjoy yourself right now? Why put it off to some magical date in the future?
Top Performers aren’t thinking about how awful their jobs are. Instead, they aim to do work they truly love AND live a great life.
I’m not anti-retirement. I have my own retirement accounts and have been investing money in them since slap bracelets were fashionable. But I’m against the idea that you need to seek out early retirement in order to start enjoying life.
Instead, I suggest you start investing money for retirement early instead.
(See what I did there?)
Because for many of us — even the Top Performers — knowing you have a growing nest egg for retirement enables you to be aggressive in other areas of your life. (And maybe there’s going to come a time when we’re going to just want to hit up the links all day or sit on a beach with a drink in our hands.)
Today, I want to show you the exact system you can use to get started saving for retirement now.
The best retirement accounts to invest your money
Before we get into the tactics on how to invest money, let’s talk about the two best investment tools you’ll ever have:
- 401k
- Roth IRA
With retirement accounts, you’ll be able to accrue gains with big tax advantages with one caveat: you promise to save and invest long term. That means you can buy and sell shares of almost anything as often as you want as long as you leave the money in your account until you get near retirement age.
We’ll talk about those exceptions a little later, but for now just know that retirement accounts give you a HUGE advantage over regular investment accounts but can tie up your money in the short term, penalizing you for withdrawing before a certain date.
But what is a 401k and Roth IRA? Do you have to jump through a lot of hoops to get them? How much do you have to invest each month?
Let’s take a look at each one.
401k: Free money from your employer
A 401k is a powerful retirement account offered to you by your employer. With each pay period, you put a portion of your pre-tax paycheck into the account. That means you’re able to invest more money into a 401k than you would a regular investment account.
But here’s the best part: Your company will match you 1:1 up to a certain percentage of your paycheck.
Say your company offers 3% matching. If your yearly salary is $150,000 and you invest 3% of your yearly salary (~$5,000) into your 401k, your company would match you that amount — doubling your investment.
Check out the graph below that illustrates this.
This is free money!!! If your company offers a match, you should ABSOLUTELY take part in their 401k plan.
Where’s my money going?
When you invest in a 401k, your money goes into an investment account where a professional investing company manages it. Typically, your employer gives you different investment options to choose from (aggressive, international, mixed, etc).
Your company does most of the work when you set up the 401k and you’ll often be able to instruct them to automatically withdraw a certain amount from every paycheck. And don’t worry about switching jobs. If you should ever decide to leave your company, you can take your 401k with you.
When can I take my money out?
The money you invest in your 401k must stay in the account until you are 59 ½ years old. If you take the money out before then, you’ll get slapped with a 10% federal tax penalty on your funds.
If you want to maximize your returns for your 401k, make sure you leave it in there until you’re ready to retire. When you do take it out, you are going to have to pay income tax so it’s not completely tax-free. However, the money you’re earning is incredibly lucrative.
For more on 401k’s, be sure to check out my article on how the account is the best way to grow your money.
But 401k’s are only one part of the equation when you want to start saving for retirement. The other account you should get is a Roth IRA. And ideally, you have both.
Roth IRA: The best long–term investment
A Roth IRA is simply the best deal I’ve found for long-term investing.
Remember how your 401k uses pre-tax dollars and you pay income tax when you take the money out at retirement? Well, a Roth IRA uses after-tax dollars to give you an even better deal.
With a Roth, you put in already taxed income into stocks, bonds, or index funds and pay no taxes when you withdraw it.
For example, if Roth IRAs had been around in 1970 and you’d invested $10,000 in Southwest Airlines, you’d only have had to pay taxes on the initial $10,000 income. When you withdrew the money 30 years later, you wouldn’t have had to pay any taxes on it.
Oh, and by the way, your $10,000 would have turned into $10 million.
That’s an exceptional example, but when saving for retirement, your greatest advantage is time. You have time to weather the bumps in the market. And over years, those tax-free gains are an amazing deal.
How to open a Roth IRA account
To open up a Roth IRA, find a brokerage account. There are many out there so I highly suggest shopping around and taking a look at the options out there.
Certain factors you want to consider when looking at brokers can be:
- Minimum investment fees
- Customer service
- Investment options
- Transaction fees
A few brokers I suggest, though, are Charles Schwab, Vanguard, and E*TRADE.
These brokers offer fantastic customer service and are well-known in the investment community for their great stock options.
Special note: Most brokers typically have minimum amounts for opening a Roth IRA, usually $3,000. Sometimes they’ll waive the minimums if you set up an automatic payment plan depositing, say, $100/month.
Also, it’s worth noting that there’s currently a yearly maximum investment of $5,500 to a Roth. (This amount changes often so be sure to check out the IRS contribution limits page to keep updated).
Once your account is set up, your money will just be sitting there. You need to do things then:
- First, set up an automatic payment plan (which we’ll explain how to do later) so you’re automatically depositing money into your Roth.
- Second, decide where to invest your Roth money; technically you can be in stocks, index funds, mutual funds, whatever. But I suggest investing your money in a low-cost, diversified portfolio that includes index funds such as the S&P 500. The S&P 500 averages a return of 10% and is managed with barely any fees.
For more read my introductory articles on stocks and bonds to gain a better understanding of your options. I also created a video that’ll show you exactly how to choose a Roth IRA.
When can I take my money out?
Like your 401k, you’re expected to treat this as a long-term investment vehicle. You are penalized if you withdraw your earnings before you’re 59 ½ years old.
You can, however, withdraw your principal, or the amount you actually invested from your pocket, at any time, penalty-free (most people don’t know this).
There are also exceptions for down payments on a home, funding education for you/partner/children/grandchildren, and some other emergency reasons.
But it’s still a fantastic investment to make — especially when you do it early. After all, the sooner you can invest, the more money your investment will accrue.
Automate your finances for pain-free investments
Once you have your accounts set up, it’s time to start investing — and there’s no better way to do this than with an automated system.
I’ve written about this before, but I’ll give a quick run down here because it’s important to know.
Automating your finances is a system that allows you to invest passively instead of you constantly wondering if you have enough money to spend.
And it’s simple: At the beginning of the month, when you receive your paycheck, the money is immediately sent to where it needs to go through automatic systems that you have set up already.
Some spending recommendations for your system:
- 50%-60% Fixed Costs: This includes things like utilities, rent, internet, and debt.
- 10% Investments: This includes your Roth IRA and 401k plan.
- 5%-10% Savings: This is money that goes towards things like vacations, weddings, home down payments, and unexpected expenses.
- 20%-35% Guilt-Free Spending: Fun money! Spend this on anything you want from nice dinners to movies.
If you want to find out more on how to automate your finances, check out my 12-minute video explaining it here:
Forget early retirement — make money and have fun doing it
Once you have your system automated and you’re investing consistently into your Roth IRA and 401k, then congrats! You’re already ahead of 99.99999% of the population when it comes to taking control of your personal finances.
You’re well on your way to wealth and living a Rich Life — but it shouldn’t stop there.
I go into even more detail in Chapter 7 of my New York Times best-selling book, I Will Teach You To Be Rich.
You can get the entire chapter, free, below. In it, I cover the nitty-gritty of maintaining your investment accounts, asset allocation, and rebalancing your portfolio to maximize returns.
I know: There’s a ton to cover here about making the most out of these accounts, but if you’re a weirdo like me, you’ll love learning about it.
Check it out now.
Retiring early: The 2 accounts that make it possible is a post from: I Will Teach You To Be Rich.
from I Will Teach You To Be Rich http://ift.tt/2vc38xf
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