As a parent, one thing I want to infuse into my kids is to start saving for retirement early. Every step you make today pays off with a more secure future.
Compound interest is a amazing thing. It grows your money while you sleep, while you play video games, while you’re at work, while you’re out with your friends. All you have to do is invest your money over the long run and leave it alone. The goal is to amass a comfortable nest egg for retirement.
Consider setting up an automatic transfer of money each month. Automating savings makes it easy to "pay yourself first," and what you don't see, you don't miss (or spend!). Its recommended to save at least 10% of your pretax income, but even if it's only $50, start small, be consistent, and keep going.
If your employer offers a 401K match, use it! This means your company will match every dollar you contribute to your 401K, usually up to a certain percentage. For example, if you make $80,000 and contribute 5% each year, or $4,000, your employer will contribute $4,000 as well, doubling your retirement savings.
Whether or not your employer offers retirement savings benefits, you can take control of your financial future by opening an Individual Retirement Account (IRA). An IRA is an easy way to set aside funds for retirement today with a "tax-friendly" account. An IRA allows individuals to save with tax-free growth or on a tax-deferred basis.
A traditional IRA allows you to set aside retirement funds that are tax-deferred, meaning your money grows tax-free until you begin taking withdrawals. Traditional IRA contributions may also be tax-deductible, which can lower your income tax.
A Roth IRA lets you pay taxes on the funds you contribute now, without having to pay taxes on future growth and withdrawals. They aren't tax-deductible and you do have to pay taxes upfront, but that could represent significant savings when your investment grows and you later wish to withdraw funds, as long as you wait at least 5 years to withdraw them.
Index funds and ETFs are among our favorite investment options. Through one of these funds, you’re buying a basket of investments rather than the stock of just one company: An S&P 500 index fund, for instance, invests in some of the largest U.S. companies; it’s classified as a “large-cap” fund for that reason (“cap,” short for "capitalization," refers to the valuation of the companies).
If you don't know where to start, I would go with ticker "VTI" Vanguard Total Stock Market Index Fund. It has a very low expense ratio and great rate of return for the past 10 years. See the chart below: