Ramit at I Will Teach You to Be Rich has posted The World’s Easiest Guide to Understanding Retirement Accounts, a brilliant introduction to these important investments. “If you start a retirement account in your early 20s and fund it regularly, you will be rich,” he says. He’s right.
Topics covered include:
- The magical benefits of retirement accounts — how the tax advantages of a retirement account are better than a standard investment account.
- Your 401(k) — the huge advantages of a 401(k) account, especially if your employer offers any sort of matching contribution.
- Your Roth IRA — why investing in a Roth IRA is essential to future financial health. They younger you are, the more important it is to max out your Roth IRA every year.
- Which to choose: 401(k) or Roth IRA — “The simple answer is both.”
Ramit makes some awesome points. I love his summary:
I already anticipate 1 billion comments debating fiscal policy, the effectiveness of Roth IRAs vs. 401(k) vs. Keogh plans vs. SEP IRAs vs. Simple IRAs, and other crap. Please don’t waste your time on this minutiae. The problem is not debating the tiny details. The problem is that most people don’t have retirement accounts. The problem is that most people don’t fund it as regularly as they should, even though $100/month makes a big difference. And the problem is that most people don’t open retirement accounts early enough. So let the fools debate. For you, just get your accounts open.
This is an important point: with many financial decisions, people get bogged down in arguing over optimal paths. Most often, though, the key is to actually do something rather than nothing. Worry about optimization later.
A lot of people believe that wealth is something that happens all at once, through inheritance or winning the lottery or magically picking the right stock. It’s not. You get rich slowly. The road to wealth is like a marathon: it’s a long race, and it’s best approached in measured, even paces. One of the best things you can do to help yourself win this race is to learn about and use retirement accounts.