Almost eight months ago, I became a mom, and my entire world changed. I wasn’t sure what I was going to do work-wise before my son was born, but when I met him for the first time, I knew. At least for now, I wanted to spend my days being his mom. But that doesn’t mean I’ve stopped thinking about our finances and the future. There are many ways you can start saving for retirement early in your career, even from the first day you start working. I took advantage of several, including contributing to a Roth IRA and then to my company’s 401(k) plan. And you don’t need to stop investing for retirement as a mom if you choose to be home with your baby. Many tax-advantaged options are still available to you, and if you have the information, you and your partner can make sure you’re set up for successful saving.
Before You Have Kids…
In general, there are two main ways to save for retirement – IRAs for individuals, and company 401(k) plans. If you work for the government or a non-profit organization, you may have other options, but we’re going to focus on these two here because they’re the most popular.
IRAs and Roth IRAs
An IRA (individual retirement account) is a great way to save for retirement if you’re young and earning money at a summer job or internship, or participating in a work-study program, or if for any other reason you don’t have the option of investing in a company plan. You can put any income you earn into an IRA, whether it’s money you earn babysitting or lifeguarding as a high school student, waitressing or writing as a postgrad, or freelancing with a gig on the side if you have a full-time job. The point is, you can start saving for retirement as soon as you’re earning. Most people don’t, but if you do, the power of compound interest means every dollar you save at age 20 is more valuable later on than if you didn’t save that dollar until age 25 or age 30.
If you invest in an IRA, you don’t pay taxes on the money until you take it out in retirement, so you’re also saving on your tax bill. But if you’re starting young, chances are you qualify to invest in a Roth IRA instead. The income limits are adjusted each year, but as long as your income as a single person is under $118,000, or your joint income if you’re married is under $186,000, you can invest in a Roth IRA (read more about the income restrictions here). When you do this, you pay taxes on the money you earn before it is deposited in the account, but the investment grows tax free and you won’t pay any tax on the interest your money earns when you take it out in retirement. If you’re younger than 50 years old, you can contribute up to $5,500 per year into either an IRA or a Roth IRA.
What’s great about an IRA is you can choose where to put your money and how to invest it. By doing your research, you can open an account for free and choose low-cost index funds to invest in, without any of the added fees that money managers often charge. That way, you’re starting to grow your nest egg and it isn’t eaten up by feeds over time.
401(k) Plans at Work
If you have access to a 401(k) at your company, take advantage of it! You can invest up to $18,000 per year in your 401(k) – or in a combination of an IRA and a 401(k) – and reap the benefits of tax deferral. If you have student loans, you may wonder whether you should pay those off before you start saving for retirement. As long as the interest rates are low, the answer is probably not. Make your payments on time, of course. But don’t lose sight of the power of compound interest when you’re talking about saving for retirement.
For decades, the stock market has provided a 7% return on investment, on average. Without getting too bogged down in the math – and there are many calculators, like this one or this one, that can show you the numbers for your specific situation – you can multiply the amount you have invested in your 401(k) plan right now by 8 to see what may be there in 30 years. If you are lucky enough to have a job in the years you’re 23, 24, and 25, and you can set aside enough money to max out that 401(k) plan while also paying your rent, feeding yourself, and making any student loan payments you have on time, DO IT! If you invest $18,000 per year for three years and then let it sit – don’t invest anymore, don’t touch it, forget it’s there, stop working to travel the world, start a family, anything you can think of – when you turn 55 you’ll have nearly $440,000 as a nest egg. If you don’t withdraw any funds, when you turn 65, you’ll have more than $880,000! Is that enough to cover the costs of your retirement? I don’t know. Probably not. What I do know is that it’s a lot of money, and it will be there waiting for you no matter what happens.
Once You’re A Mom
If you work outside the home, or you have a work from home setup with your company, you can keep on as you were. If you’re freelancing for some income on the side, or you’re staying home full time, you have a couple of options.
Even if you’re not earning any income, your spouse can contribute to an IRA or a Roth IRA in your name, so you can continue to take advantage of the tax benefits. You must be married and file a joint tax return to take advantage of this account, but once it’s open, it is solely in your name. This is a great way to make sure you have assets in your name as a stay at home mom. Even if you’re married for the rest of your life and your husband makes enough money to support you from now through retirement, having assets in your name means you have something that you, personally, can spend as you wish during your retirement, or choose to pass on to a child or your favorite charity when you’re gone. It also means you have assets to back you up if you want to open a new credit card as the primary cardholder – just one of myriad reasons to open this kind of account!
If you earn a little money from freelance writing (cough cough), doing some bookkeeping, or keeping up any kind of professional skill with one-off work, you can set up an individual 401(k). The benefit to doing this, rather than just contributing to an IRA, is that you can invest earnings up to the 401(k) limit ($18,500 in 2018) rather than the much lower IRA limit. You can, of course, keep on with your IRA if your earnings are more suited to that investment, but it’s always good to know your options.
What You Should Remember
If you only take away one piece of advice from this post, it should be this: saving for retirement before you have kids means that even if you decide to stay home as a mom and you don’t return to the workplace, in a few decades down the road you can have a nice financial cushion waiting for you. The key is to save and invest while you’re young. Even if you can’t max out your accounts when you’re fresh out of college, put as much in as you can. You’ll be amazed at how it pays off.
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