While working as a hairstylist has become your dream career, the chances that your salon offers retirement benefits is slim to none. It's easy to put off saving money until later, but it's crucial to determining how you'll spend your golden years. Here we'll break down ways to plan ahead for retirement.
If you haven't already started, start saving now! Of course, it's not always easy to put aside money when the mortgage is due if you had a slow week, but putting away something each week is still better than nothing. For the 28 and under set it's recommended to save 10%-12% of your income, and for those older it gets bumped up to 12%-15%. Commit to save and soon it'll become habit.
Open an IRA
An IRA is an Individual Retirement Account that is opened in your own name. It's considered a tax-advantaged account because it allows retirement savings to grow without being taxed as long as the money is in the account. Currently, you can contribute up to $5,500 a year to an IRA.
When choosing the type of IRA you have a couple of choices:
- Traditional IRA—This type of IRA is "tax-deductible" meaning that if you made $40,000 in a year and contributed 3,000 to your IRA, you'd only pay income tax on $37,000. Once you withdraw the money at age 59 1/2 or later, it'll be subject to an income tax. If you withdraw it before that age you'll have to pay an income tax and a 10% penalty (unless it's used for qualified higher education).
- Roth IRA—With a Roth IRA, there's no up-front tax deduction for a contribution, but you can withdraw funds income tax free at age 59½ if you've held the Roth for at least five years. You have to pay tax if you withdraw earnings (as opposed to your contributions) in the first five years, and there'll also be a 10% penalty if you withdraw earnings before turning 59½. However, there's never a penalty for withdrawing the money you contributed. This is a great option for those who have limited funds to make larger contributions.
What else is great? You can set up automatic deductions into your IRA from your checking account. You'll hardly notice the difference after a few months.
Brokerage Accounts and More
If you've still got money to invest after putting money into your savings and IRA (good for you!), then you might consider opening a brokerage account. This type of account lets you purchase stocks, bonds, mutual funds and other investments by paying professionals to buy and sell the items you tell them to. Depending on what it is, you'll pay them a commission ranging from $5 to $100.
Another investment option is the MyRA, which is aimed at workers without workplace retirement benefits. MyRAs function as a Roth IRA, allowing savers to invest after-tax dollars and withdraw the money in retirement tax-free. But unlike traditional Roth IRAs, the accounts will solely invest in government savings bonds. They will also be backed by the U.S. government, meaning that savers can never lose their principal investment. This is a great option for those who lack the necessary funds to open a traditional IRA. These accounts though will have smaller returns than other types of IRAs.
Talk to a Professional
Still have questions? Talk to a financial adviser or check out one of the newer online companies such as, Wealthfront Inc., Personal Capital Corp., Jemstep Inc. or FutureAdvisor, for advice on how best to maximize your money for retirement.