What You Need to Know About Retirement

Have you thought about saving for retirement yet? I know it may seem early, especially if you’re fresh out of college and just starting a new job. But the truth is that investing in your retirement is more important than you may think. With just 51% of our readers investing in a 401(k) (YIKES!), I thought it would be important to discuss what exactly a retirement savings account looks like, why women should be contributing and how we can best manage these accounts.

What, exactly, is a 401(k)? A 401(k) is an investment fund that you put pre-tax dollars into to save for retirement. Since it's an investment rather than a traditional savings account, it has much more potential to grow, especially because we are currently in a low-interest rate environment. Think of it this way: your savings account sees a growth of about 1% per year due to interest, right? And with inflation, that growth is nearly negated. Meanwhile, the S&P 500, a good benchmark for the stock market, has grown 12% just since the election. Your money works for you better when it’s invested in the stock market. It also keeps up with inflation.  

Why should I be invested in a 401(k) or Roth IRA? We know that social security is currently underfunded, healthcare costs are rising and pension funds pretty much no longer exist. The fact is that to continue living as you would on a $50,000 per year salary, you’d need to save $1.9 million for retirement. That is BONKERS. What’s more is that women live longer than men, yet are put on investment plans designed for men. And if women decide to take time off to have children, their retirement savings options become limited. For these reasons, a 401(k) or Roth IRA is a smart choice.

How is it different than a Roth IRA? When investing in retirement, you have two options: You can go with a traditional 401(k) or you can choose a Roth IRA. The difference is in how the money is taxed. A 401(k) is taxed when you pull the money out of savings (likely in several years). A Roth is instead taxed at the time you put the money in. 

Which is a better option? Since taxes go up and your money is growing in an investment, a Roth IRA is a better option to save in the long run. 

How should I be allocating my assets? Diversification is key! That means having some money in stocks (which are the riskiest investment), some in bonds (medium risk) and some in cash (lowest risk). Investing in small, mid-size and large companies, as well as in different geographic areas is important. You can change your investment preferences by talking with an advisor at your 401(k) or Roth IRA provider. To reach them, either log in to your company's benefits website or reach out to HR at your company. 

What about employer matching? Some employers match your 401(k) investments up to a certain percentage. So, for instance, if you put 6% of your income into your investment, your employer would put up the same amount of cash. Financial pros recommend contributing the highest percentage matched by your employer, so you can fully take advantage of your benefits. 

I just checked up on my investments...why are they up higher than expected? A 401(k) and Roth IRA ebb and flow with the stock market. We’re currently in a bull market, which means that stock prices are on the rise. Your investments may be outperforming expected returns as a result of the current bull environment.