Are you looking to build wealth as well as achieve financial independence or just contribute to your retirement but don’t know which account to choose? Financial independence is what separates the poor from the rich.
Are you tired of looking at too much information that is not clear about which retirement you should choose? I’ve got great news for you. Picking a retirement account is simple and is always determined based on your goals for the future.
Knowing the information below brings you one step closer to financial independence. Just think for a second.
Think of how much better your life would be if you were at a place in your life were money wasn’t an issue. This is financial independence in its purest form.
Every independent financial person knows the retirement options they have so they can plan accordingly. It is best we do the same.
A survey by the Federal Reserve talks of retirement saving strategies being different by circumstances and age, survey respondents are asked to assess whether or not they feel that they are on track, however, they define that for themselves.
Thirty-six percent of non-retired adults think their retirement saving is on track, 44 percent say it is not on track, and the rest are not sure.
The amount currently saved for retirement is another way to assess preparedness. One-quarter of the non-retired indicate that they have no retirement savings or pension whatsoever. Of the non-retired aged 60 and older, 13 percent have no retirement savings or pension.
More data from the Federal Reserve show older adults are more likely to have retirement savings and to view their savings as on track than younger adults. Nevertheless, even among non-retirees in their 60s, 13 percent do not have any retirement savings and 45 percent think their retirement savings are on track.
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2 Common Types Of Retirement Accounts
There are quite a few different retirement accounts, but I’m going to discuss just two types of retirement accounts: the traditional IRA and the Roth IRA. Many independent financial people choose account based on their own personal preferences.
Most independent financial people will say there is no wrong answer. I’m going discuss how to pick one. So, before I start what is the retirement account?
A retirement account is an account you use to save so you can accumulate and save enough money when you’re no longer working.
It is for the purpose of having a large lump sum of cash to last you until your last days and if any left to go to your beneficiaries. Having some cash leftovers for people you care about that you want to leave an inheritance to is always a great thing.
You should do what most independent financial people do. Start with the end in mind and think forward about what your financial goals are.
Next, write down your goals and then the pros and cons of a traditional and Roth IRA and see which account aligns the most with your future goals. The answer will be clear to you which to choose.
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Difference Between Traditional IRA & Roth IRA
The biggest difference is how and when the IRS taxes the money. When you’re dealing with a traditional IRA, contributions to a traditional IRA are tax-deductible and withdrawals are taxable. Basically, money put into a traditional IRA is pre-tax dollars.
At the end of the year, let’s say you contribute $5,000 to your traditional IRA. You can deduct $5,000 from your income on your taxes. As far as Roth IRA, this is the one that I chose.
The money put in this account is after-tax dollars so you cannot use a tax deduction from money put into the account. Withdrawals are tax-free only if you withdraw the money you put in after the first 5 years of the date you opened your account.
You’re taxed on the gains of the money so if you only withdraw the money you put in and not the financial gains you will not be taxed.
To do a recap, once again, traditional IRA are pre-tax dollars. Roth IRA is after-tax dollars. I chose a Roth IRA personally because decades later I may want to withdraw cash for investments.
A person may be in their mid-forties or fifty-s and may be like “you know what, I want to start buying real estate” or “I want to use my retirement money to fund a business or a passion”.
You can withdraw from a Roth IRA without being taxed but if you do that with a traditional IRA and don’t meet the IRA exempt guidelines you will be taxed.
I know a lot of people who had traditional IRAs, and they also had a 401K. They withdraw cash so they can start their venture because they needed money. The government taxed it. I decided early I didn’t want that to happen, so I chose the Roth IRA.
I don’t like the idea of having my retirement money not even accessible to me if I need it.
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How Much To Save After Choosing A Retirement Account
The rule of thumb is 10% of annual savings but it is recommended you aim for 15% or more. Try to get your savings rate up over 20% and you will see a major increase in your wealth over decades, assuming you are making 8% to 10% investment returns per year.
I recommend to anyone start contributing to the retirement account as early as possible and as aggressively as possible. You don’t want to end up broke at the end of your life. Before I choose my account, I knew, I wanted to fire retire early.
To fire retire early you basically save anywhere from 30% to 70% or more of your annual income. Easier said than done but most people who fire retire early have either high incomes or are aggressively frugal.
If you are confused about the fire retire early concept, I have more information about this towards the end of this article.
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What Happens If You Ignore Saving for Retirement
I have connected with content and stories that I can relate to so here is one of them. I was watching a business video from a wealthy man with his own his investment firm. He said when he was young, in his 20s, he was working and saw other men who where around 70 years old or older.
He was like, what happened to you? And they responded to him, I didn’t take my finances serious so I’m stuck working and can’t even retire.
They didn’t take their finances seriously and they paid for it at the end of their life.
A common mistake, from studies and expert financial professionals mention how citizens make the excuse and falsely believe they don’t make enough to save.
Saving can be hard at first and seem impossible with all the bills piling up I’m sure there’s some partial truth to not being about to save but you have to push to save whatever you can.
Like when you get your paycheck and put $20, $30, $40, or $50 to the side or more is a good financial habit that serves you.
And when you start doing that and not touching it, your money will start growing. And at the end of the year, you would have hundreds, thousands, tens of thousands and much more and the money will just keep accumulating.
When you have money in the bank you feel better, breathe better and often happier. That’s a great feeling. So don’t end up broke like some of these people who ignored their finances.
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Conclusion
I’ve met some of these people who were forced to keep working at a old age. One of my first jobs, I was talking with a 70- and 80-year-old man and they’re still working.
In my mind, I’m like, dude, what was he doing for 40 years and have nothing to show for? I try to learn from other people’s mistakes.
Take your finances seriously. I’ve studied over 3000 hours of personal finance and wealth creation strategies, which is not taught in most schools, not even in colleges SMH. We spend all this time earning money but are never taught how to save it and invest it. The system needs a lot of changes.
This content is not even discussed in family settings. This basic financial education would serve many if people learned and acted on proven wealth creation techniques.
I hope you enjoyed this content. If you have any questions, let me know and leave a comment.
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Bonus: (Join the FIRE Retirement Movement Or Continue Your FIRE Pursuits!)
Ever heard of a FIRE Retirement? Consider joining the FIRE retirement movement. I’m part of this movement. We all aim for a FIRE retirement.
This means we are a group of professionals and entrepreneurs that are aiming to retire before the traditional age.
If you’re already a part of this FIRE movement for independent wealth, then congratulations your family.
You will grow even more at this website because as we pursue independent wealth, we share strategies to grow our incomes faster through business and investments.
The topic of independent wealth can be scary so here it is simplified and easy to understand so you can use. Leave a comment or ask me a question.
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