With the prospects for Social Security growing dimmer every year without serious entitlement reforms, and the date when benefits will be cut approaching, it is extremely important that everyone prepares for their own retirement.
According to an annual report from Social Security and Medicare trustees, the Social Security trust fund will only be able to afford paying 79 percent of promised benefits by 2034. Several programs included in Medicare, which cover everything from prescription drug coverage to hospital costs for seniors, could lose funding in the relatively near future.
This highlights the importance that everyone and especially students need to plan for their own retirement in preparation for the overwhelming possibility that the government will be unable to foot the bill when the time comes.
There is a simple option to prepare retirement. The Individual Retirement Account (IRA) allows people to invest savings generating profit, which are then reinvested to accumulate.
Depending on your personal situation, you can choose a Roth IRA or a traditional IRA.
The contributions to a traditional IRA can be used for tax deductions, however taxes will have to be paid after withdrawing the money. A Roth IRA offers no tax deductions for contributions, but none of the money will be taxed once it is withdrawn for retirement.
Both have their pros and cons and the best pick depends on the your situation. If you are working with a budget and would benefit by saving money in the short term, a traditional IRA would be best, but depending on your employer, tax deductions may not be an option, and a Roth IRA would offer a better retirement plan.
A Roth IRA doesn’t offer any tax deductions in the short term, but none of the money will be taxable once you withdraw it, offering retirees a large amount of money tax-free. The biggest incentive for investing in an IRA account is that profits are reinvested and compound interest can accumulate a small fortune by the time you are ready to retire.
If you open an account at the age of 18 and contribute the maximum amount of $5,500 annually ($6,500 if you are over 50) you will be a millionaire by the time you are eligible to withdraw the money at the age of 59. Most college students won’t be able to afford to contribute the maximum amount but getting started early is the best way to get the ball rolling.
Getting an IRA is as easy as opening an account at your local bank or credit union, but the Internet has allowed easy access to brokerage firms such as Vanguard and Schwab who will help manage an account for a small fee.
There are a multitude of opportunities to begin investing, and some research online will prepare any student for the far off prospects of retirement.