You rarely would put “retirement savings” and “fun” in the same sentence, but by the end of this post, you’ll realize how investing in target date funds really does make retirement fun. Principally because target date funds do the work for you…more on this in a minute.
First, just a quick refresher on a what a Roth IRA is. It’s a retirement account and is often confused with a 401(k). A Roth IRA has nothing to do with your employer, where a 401(k) is obtained through your employer. You can open up a Roth IRA at a discount brokerage firm, such as Vanguard or T. Rowe Price. If you’re under age 50, you can contribute a maximum of $5,000 per year to the Roth IRA – note, that you’re contributing money you’ve already paid taxes on (unlike a 401(k), where you contribute pre-tax dollars.) You can take out your original contributions at any time (without any penalties.) Though any earnings you make must be left in the account until age 59.5, otherwise you’ll be slammed with a 10% penalty (though you shouldn’t be withdrawing any money from the account, since the goal is to keep the money there and let it grow.)
Anyway, the earlier you open up such an account, the more money you’ll end up with when you retire, thanks to compounding interest, which thrives when there’s time on your side.
Back to target date funds: these funds encompass one of the basic principles of investing, which is that you can take on more risk when you’re young. Think about it: If you’re 25 years old, you’re not going to retire for another 40 years – so you can afford to invest in riskier investments, like stocks, compared to someone who’s 55 and retiring in five or ten years and needs that money sooner.
With a target fund, you’ll start off by investing in stocks, which are rather risky (but with more risk comes more reward, you know that!) As you get older, the fund will transition into safter investments, like bonds and treasuries. It’s that simple.
Head over to an online brokerage firm, open up a Roth IRA, setup your target date fund and watch your retirement savings grow.