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Best Retirement Plans for Young Adults

Best Retirement Plans for Young Adults

The majority of young adults are unsure about when they should begin investing for retirement. Many millennials are currently preoccupied with paying off school loan debt while coping with the economic consequences of COVID-19. It is critical to begin saving your money much earlier in life in order to be prepared for retirement later in life.

To develop long-term wealth, millennials must begin prioritizing their retirement savings goals. Simple modifications might help you avoid financial stumbling blocks that make it harder to save for retirement. Thus, this article brings the best retirement alternatives for young folks to consider as they begin to plan for the future.

Why You Should Prepare for Retirement Early?

Before jumping into the best retirement plans for young adults, it is important to understand why you should start saving for your retirement early in life.

The reason why it is so important to start saving for retirement as soon as you can is that having a longer horizon gives compound interest more time to work. When you earn compound interest, the interest you earn on a balance in a savings or investment account is reinvested, giving you even more interest. It is essentially money creating money.

Let's try to explain it better with an example:

Let’s say you start investing in the market at $100 a month, and you average a positive return of 1% a month or 12% a year, compounded monthly over 40 years. Your friend, who is the same age, doesn’t begin investing until 30 years later, and invests $1,000 a month for 10 years, also averaging 1% a month or 12% a year, compounded monthly.

Who will have more money saved up in the end?

Your friend will have saved up around $230,000. Your retirement account will be a little over $1.17 million. Even though your friend was investing over 10 times as much as you toward the end, the power of compound interest makes your portfolio significantly bigger.

This is why it is never too early to start making financial plans for your retirement years. Thus, now that you know the importance for young adults to have retirement plans, it is time to see which are the best alternatives for this age group.

Best Retirement Plans for Young Adults

When it comes to financial anything, there is no one service or institution that is the best for every customer. The same counts for retirement plans. Ultimately, the best retirement plan for a young adult will depend on this individual’s goals and needs. However, it is still possible to highlight some of the best retirement plans that fit most young adults’ requirements and financial targets. The ideal is that you don’t use only one of these options, but instead create a diversified portfolio that will guarantee you a financially comfortable retirement.

Thus, here are the best retirement plans for young adults:

401(k) Retirement Plan

A 401(k) is a type of retirement plan that allows employees to contribute a part of their earnings to individual accounts via payroll deductions. You may deduct contributions to a 401(k) on your tax return, which can help you save a lot of money each year.

If you begin making regular contributions to your 401(k) account in your early twenties or thirties, your tax-free savings will have more time to grow. Making 401(k) contributions at an early age allows you to maximize your long-term benefits while minimizing your losses.

Employees can contribute to their accounts up to an acceptable monetary limit imposed by the Internal Revenue Service (IRS). With a 401(k), an employee's contributions to their account will lower their annual income taxes. Withdrawals, however, will still be taxed.

Employers will frequently match employee contributions up to a certain percentage of their income. When available, enjoy the benefits of matching employer contributions via company-sponsored retirement plans.

Life Insurance

Many millennials disregard the pros of purchasing appropriate life insurance. Getting life insurance at a young age is a fantastic way to preserve money for your future retirement. When you're young and healthy, life insurance is quite reasonably priced. That is because insurance companies regard you as a low-risk client.

Individuals who are young and do not have any prior health issues will be able to lock in a low monthly cost for their insurance plan. If you begin saving for life insurance early, the cash worth of your savings account will rise significantly each year as you continue to make monthly payments.

Crypto Savings Accounts

Crypto savings accounts, such as Outlet, can be a great option to earn interest on the money you saved for retirement. A cryptocurrency savings account allows you to participate in the cryptocurrency market while still earning interest. It is just like a regular bank savings account but focused on cryptocurrency. In some, you will need to invest already in crypto, while others accept fiat currencies. This is how it works:

For the most part, it works just like regular savings accounts. You put money into a savings account, the institution lends your money to investors, and you earn an interest rate in exchange. However, in the case of crypto savings accounts, the funds for this process will be cryptocurrency.

So, whenever you create a crypto savings account, you are putting money into a digital currency like Bitcoin or Ethereum. Then, the savings account provider will lend your cryptocurrency to borrowers in return for a portion of interest. You will receive a share of this interest. Since there is a scarcity of money invested in crypto, with more demand than offer, the interest rates of these cryptocurrency loans are very high. That is how these crypto-based savings accounts manage to give their clients interest rates that can go as high as 12%.

To keep the crypto savings accounts safe, most of them work with overcollateralized lending partners. They also use strategies similar to banks, such as distributing one investor's money throughout many borrowers, assessing investment risks, and so on.

Still, it is important to be careful. Cryptocurrency is a very new and experimental market. Even though most crypto savings accounts providers take safety measures, it is a volatile market and most of these accounts and not FDIC insured. Like every type of investment, make your due diligence and understand the risks involved in it. Once this alert is given, it is important to highlight that major safety issues with crypto savings accounts that resulted in major money losses are yet to be seen.

Individual Retirement Account (IRA)

How you invest for retirement determines not just how much income you will have in retirement, but also how you will be taxed. Thus, an IRA is an option for retirement that presents some good tax conditions. An IRA is an account that allows an individual to save for retirement with tax-free growth or on a tax-deferred basis. The three basic forms of IRAs each have their own set of benefits:

  • Traditional IRA: The contributions you make to the accounts may be deducted from your tax return. In addition, any gains can potentially grow tax-free until you withdraw them in retirement. Many retirees find themselves in a lower tax band than they were before they retired. Therefore, tax-deferral implies the money may be taxed at a lesser rate.
  • Roth IRA: Contributions are made using money that has already been taxed (after-tax). Your capital will then potentially grow tax-free, with tax-free withdrawals in retirement, if certain requirements are fulfilled.
  • Rollover IRA: You contribute money to this traditional IRA that has been "rolled over" from an eligible retirement plan. Rollovers are the transfer of qualified assets from an employer-sponsored plan, such as a 401(k) or 403(b), to an IRA.

Regardless of your choice, the tax benefits of IRA accounts allow your savings to potentially grow, or compound, more quickly than in a taxable account. However, there are some disadvantages to using IRA accounts. For starters, the interest rates are not very attractive.

Another downside of a typical IRA is the mandatory minimum payout (RMD). If this is still in place when you reach the age of 72, you will be compelled to withdraw a certain amount each year and pay income taxes on it. Previously, the RMD age was 70.5, but with the passing of the Setting Every Community Up For Retirement Enhancement (SECURE) Act in December 2019, the RMD age is now 72.7. Also, keep in mind that, even though IRAs let you get a discount on taxes, you will still have to pay them at some point, be that when adding the money in Roth IRAs or when taking it out when it comes to traditional IRA accounts.

The Bottom Line

The sooner you begin saving for retirement, the better. When you start early, you can afford to put away a lower quantity of money per month since compound interest is on your side. Ultimately, the most important thing about saving is getting started, and there are great traditional and more adventurous options out there.

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