Let's talk about retirement planning. First off, it is never too early to start putting money away for retirement. Yes, even your children can have retirement accounts that build wealth over time. To be quite honest, the earlier the better. The reason being is something beautiful called compound interest. Let's take a look:

• Let's say you start out with $1,000

• If you earn an average annual interest of 10%, then by the end of the year your account will have $1,100 ($1,000 * 10% = $100)

• Now, in Year 2, that 10% will be calculated against $1,100, not the original $1,000

• So as you can see, the more your money grows, the higher the interest accrued, which in turn grows your money larger, and the cycle continues on!

• NerdWallet has a great Compound Interest Calculator for you to play with

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Now let's talk specifics.

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Individual Retirement Account (IRA)

• IRAs are retirement accounts that are funded by individuals and tied to the stock market

• Contributions are usually made directly from a person's paycheck; You can also make one-time payments right out of your bank account in case you want to make lump-sum contributions

• The account balance, which is funded from your contributions to it, will fluctuate higher and lower based on how the stock market is performing

• More specifically, your retirement account is an investment into mutual funds, index funds, and ETFs, so your money is directly impacted by the performance of that fund

• When you retire, the amount in this account will be yours to take distributions from, but you must be a specific age before you take distributions or there will be a penalty

• The goal is to have an account balance high enough to support your retirement, although it's never guaranteed - we can help find your desired amount if you're interested!

• There is also the ability to take loans against your balance, but we suggest speaking to your employer or an advisor before doing so to understand the implications

• There are two types of contributions you can make: Traditional and Roth

  • Traditional

    • Pre-tax contribution -> you contribute to this plan before you pay taxes on your paycheck​

    • Distributions from this account will be taxed in retirement

    • Pro: It reduces your taxable income right now

    • Con: You'll have to pay taxes on it in retirement

  • Roth

    • Post-tax contribution -> you contribute to this plan after you pay taxes on your paycheck​

    • When you retire, the income you receive from this plan will be tax-free​

    • Pro: You will not have to pay taxes on the principal amount in retirement

    • Con: If your tax rate is lower in retirement, you may have missed out on tax benefits early on

• Nerd Wallet has a great Retirement Calculator for you to use!

• There is another mechanism for you to use to help fund your retirement: Life Insurance (yes, life insurance). We have an entire section on this for you to review, but just know that it is a very effective tool for protecting your assets and funding your retirement simultaneously.

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Now, the fun part. Which one should you choose?

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The answer? It depends on the person (I know, that's an annoying answer).

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Traditional IRA accounts are great for reducing taxable income, whereby Roth IRA accounts are better suited for receiving tax-free benefits in retirement. From a high-level, for those with a low to mid range salary, would probably lean towards a Roth IRA. For those high earners out there, a Traditional IRA might make sense. However, what we will suggest is starting as early as possible to get as much compound interest benefits as possible! And for those who are contributing to an employer-sponsored plan (401k, 403b, etc.), the goal would be to contribute at least the amount that your employer will match (if applicable). That is free money for you earn for your retirement, so take advantage! Of course if you want to contribute more or less, do so at your leisure, but that is friendly advice from us at Polymath Finance.

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Special thanks to our friends at NerdWallet for the free resources! They aren't a sponsor or anything, we just like their stuff. 

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