Investing to Early or for Wrong Reasons can Hurt your Future
Everywhere you turn you will see advertizing from investment firms telling you to invest in your retirement. The biggest retirement accounts are 401(k) and IRA that allow you to save money for your future retirement. 401k retirement plan is around for a while now but there are still a lot of people that contribute to the IRA or 401k without understanding it. Most people save for their retirement because there co-worker, neighbor even friend is.
First you need to understand how those account work. IRA is slight different than a 401k but they have the same purpose, to some for your retirement. You can contribute to you retirement account as often as you would like, and as much contribution as you wish. Most of the time it is a percentage from your paycheck and the amount is taken pre-tax so that only the reaming amount that you take home is taxed. What a lot folks don’t realize that 401k contribution is pre-taxed and not Tax-Free. Once your account matures when you turn 65 years old you will start getting a paycheck on a weekly or monthly basis and its usually same amount as you getting from you job. The only thing is that you need to know that the paycheck will look like you work paycheck, meaning it will be taxed. Yes you have to pay taxes on your 401k and your IRA unless your contributions were taxed prior.
Most retirement plans will not allow you to just withdrawal the whole amount when you reach retirement age, you will only be allowed to get a normal paycheck as you did before. So the plan to spend a month in the Caribbean’s just went out the window, purchasing that dream house in full is not going to happen. You need to realize that you will be almost 70 years old and not 30, 40, 50 or 60. You already know that you cannot do the things that you did when you were in your twenties so what makes you thing that you will be able to do the same when you turn 70. The only thing that you will be spending your money will be on doctors and medication, unless you take care of yourself to stay healthy than you might be able to go on few trips with friends to play some golf.
The biggest mistake people make that they start to contribute to their retirement plan and even start Collage fund for their kids prior to settle the current debt. Your first priority is to make sure all you credit cards are payed off, mortgage is payed off, and you have at least $15,000 or more in your savings account at all times. Once you do that you can start making small contributions to you retirement. Contributing to your IRA or 401k prior to that will result that you will be loosing money and not gaining like the investment companies claim.
You need to remember that there is a Interest rate on your credit cards and on your mortgage. College tuition keeps going up on a alarming rate. You need to understand that even if you save a lot for collage education it will still not cover the whole cost. Best solution is focused on making sure you are free and clear from dept and once collage time approaches you can take out a loan and pay for it. Your retirement account is based on stock market mining that it can gain value or can even loose like you have already seen. A lot of people have lost most of their life savings and the only person that did not lose was your 401(k) or IRA broker. Investment Firm brokers charge fees for maintenance of your account and every time you contribute, buy stocks, sell stocks or do a withdrawal.
Even if your retirement account is gaining value, believe it that you are not getting any richer. You need to look and few factors: What is the percentage value gain has your 401k has received vs. what percentage is the inflation. When you do your calculation you will notice that inflation percentage is a lot grater then your investment. If your lucky you will break even or maybe you would be slightly on top. Retirement plan is not a true investment unless the value of it suppresses inflation rate.
You need to understand that Investment firms are just like a sales person, there job is to sell you a dream and make profit from it. They will tell you a lot of thing that are not true just to get a sale. The fact is when you retire you will not be spending as much as you do now. If you die before you spending all your regiment money, your kids will get it. Unfortunately they will only get a small portion of it as it will be subject to taxes once more and this time at a much higher rate. So in reality retirement is not the best option. Make sure all your affairs are in order first before you start investing in your future. Live a little now rather than hoping you will do that later as you never know what the future might bring.