You might be unsure about how to best financially prepare for your retirement, especially if you do not have a background in finance. The most obvious choices are saving and investing. Retirement savings commonly take the form of Roth IRAs and traditional savings accounts, while investing can take the form of stock marketing investing or investing in other assets.
When it comes to retirement savings, one of the most common questions is whether to go with a Roth IRA and a traditional savings account.
Traditional Savings Account
A traditional savings account is a bank account that you open with a regular consumer bank. You can deposit money into it from your paycheck or other income. These accounts tend to have very low interest rates, so they grow very slowly– often they grow more slowly than inflation. That means they actually lose value over time. However, these accounts have the advantage of safety. They are insured by the FDIC up to $250,000, and in practice you will never need to worry about anything happening to that money.
A Roth IRA, or individual retirement account, is an investment account. You take some of your income and add it to the Roth IRA after paying taxes on it. Then you can invest that money in stocks, bonds, mutual funds, ETFs, and other financial instruments. It will grow much faster than in a savings account, but it does carry the risk of loss if the investments turn out badly. Usually, an IRA is operated by a financial services company, and that company will offer you a set of funds and plans to choose from so that you don’t have to monitor the individual investment choices.
Stock Market Investing
Stock market investing is one of the most important ways to build up wealth. It is something that can take years or even decades, and you do run the risk of losing money, but in the long run, the stock market always tends to rise eventually, even if it hits some rough patches along the way. That makes it an ideal vehicle to save money for long-term goals, like retirement.
Investing in the stock market can be complex because there are many different financial instruments that can fluctuate in value based on changes in the price of one or more stocks. However, the basics are simple– buy stocks that you expect will increase in value and hold onto them until that happens. The simpler you keep the strategy, the easier it is to understand how likely it will be to succeed and pay off. Keep in mind that there is absolutely no such thing as a guaranteed profit, and you should be very suspicious of any strategy that promises large, immediate gains with low risk. A good part of investing in the stock market is staying focused and avoiding scams.
Learning about stock investing is a good idea for your own financial planning and literacy, but do it with a licensed professional to give you advice and help you. That is the safest way to protect yourself from mistakes and bad decisions that could get in the way of your goals. It’s about commitment and a willingness to wait for a while before your investment is a success.