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Planning for Retirement when you are young can be hard to do. You were probably never taught this in school and unless your parents took the time to teach you, things might still be a little unclear. Here are the basics of what you need to know and why its important to start now.

Why it’s Important

Planning for retirement when you are young is one of the best financial decisions you can make for yourself. The thing you have working for you is time. Time is on your side since the money you invest in retirement is compounded until you quit the work force. Here is a good example.

If you were to invest 1,800 every year for 8 years at 12% starting at 18 you would end up with 2.2 million dollars at retirement. That’s a huge sum even though you didn’t invest a dime after the age of 26.

However if another person were to only start at age 26 with the same interest and deposits they would have to invest for 40 years to even get close to the amount of someone who started at age 18.

How to Plan for Retirement

Now that we know why it is so important, lets look at the different options in order to save for retirement.

401k- The company you work for often offers this and sometimes will even match your donations into your retirement account to a certain amount.

Roth IRA- This is after tax income put into the account. It’s tax-free on earnings and withdrawals after age 59 and a half. There is a limit to how much you can invest.

Traditional IRA-The amount you put into the account is not taxed until distributed. They can even be deductible on taxes for either the whole amount or a partial amount. There isn’t an age you can’t touch it but when it comes to retirement your best bet is to leave that money to grow.

These are all options that you can use to your advantage most often people max out their 401k before starting a IRA but how you go about it is ultimately up to you.

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