Investing Strategies for Teens and Young Adults: Retirement

Retirement is a stage of life that most people look forward to: no work stress, freedom of time, and peace of mind. However, according to a 2023 Gallup poll, only 43% of non-retired adults expect to be financially comfortable in retirement. Yet, this number is expected to worsen, considering millennials' spending habits and, soon, Gen-Z. Despite the financial indiscipline of the younger generation, there are ways to prepare for retirement financially.

401(k)

A 401(k) is a retirement account that is offered by employers to their employees, where employees can allot a certain amount of their paycheck towards the account, which they will not be able to access without a penalty until the age of 59 and ½ years. 401(k) accounts are unique because many employers will offer a matching contribution, essentially “free money” for your retirement. You can then use the money inside the 401(k) account to invest in various investments, including stocks, bonds, and mutual funds.

IRA

IRAs are Individual Retirement accounts that are set up by an individual through a financial institution, usually a bank. Like 401(k) accounts, IRAs offer users the ability to invest the money inside the account into various investments, including stocks, bonds, and mutual funds. However, it is important to note that IRAs offer a greater variety of investments than 401(k) accounts, but the contribution limit for users is less than that of 401(k) accounts.

Roth vs. Normal

For IRAs and 401(k) accounts, an extra layer of complexity is added with the availability of “Roth” accounts. Traditionally, users’ contributions to their retirement accounts are tax-deferred, meaning that tax will be applied to the money in the account once money is taken out of the account, whereas “Roth” accounts tax the users’ contribution while leaving withdrawals tax-free. Although tax deferral is the main difference, it is important to research each of the accounts and their features before making a decision.

Conclusion

Before making a decision, it is important to consult a financial planner who can give you an idea of which account will be best for you. Regardless of the retirement account you choose, it is important to start contributing early because the compounding effect of returns is incredibly powerful and painful to miss.