It might be hard to believe now, but one day, you're going to be retirement age. If you start saving now, you'll be sitting pretty in the future. Compounding interest helps people who save early reach their goals less painfully than people who wait. Because retirement funds come in many different flavors, such as IRAs and 401(k)s, it’s important to identify which is best for your needs. After you decide, there’s only some basic paperwork to complete and you’ve opened your own retirement account. Finally, you’ll need to pick investments inside your retirement fund that historically have helped others reach goals similar to yours.
Ask about a retirement fund at work. If you’re eligible for a 401(k), 403(b) or similar plan at work, you might not qualify for tax benefits in outside accounts, such as an IRA. Therefore, it often makes the most sense to use a workplace retirement plan. Check with your Human Resources department for information on your plan and to determine if you meet the eligibility requirements.
Open a retirement plan outside of work if one isn’t available through your employer. Choose a plan that best meets your tax needs. IRA plans may be tax deductible now, saving you money on this year’s 1040. Roth IRA plans are taxable today, but money invested grows tax-free toward retirement. People with high incomes may not be eligible for a Roth IRA. Because qualifying amounts change often, use the search function on the IRS.gov website to look for “current year IRA limits” to find this year’s qualifying amount.
Write out your goals and risk tolerance. The Securities and Exchange Commission recommends writing out your goals to determine how much you need to save into your retirement plan. Websites such as Yahoo! Finance, MSN Money, and CNN Money offer basic calculators that can help you. If your risk tolerance is low, use a low return on your money when calculating retirement needs. If you don't mind the roller coaster of higher risk, you can use larger returns in the calculator, but remember that higher return assumptions are more volatile and might not reach the goal.
Read the prospectus for each fund to find historic returns, the types of investments it makes and fees. Outside plans may charge fees for each fund you open, so it may be wise to start with a single fund. Stock funds are more volatile than bond funds but offer the chance of higher returns, while money market funds are lower risk and lower reward than either stocks or bonds. Some investors choose a premixed fund of stocks and bonds called a lifecycle fund, which targets a retirement age and lowers investment risk as that year approaches.
Fund your account after deciding the amount and frequency of your investment. In a workplace retirement fund they'll ask for your contribution amount as a percentage of your salary, such as 10 percent. In outside plans you'll choose a dollar value to invest. Many funds have a minimum investment of $2,000 or more, but if your budget is tight, some will allow amounts as low as $50 if you sign up for automatic monthly investments.