Q: How does a young person start out in the world of CD rates, money market rates, etc. For example, why would I choose CDs over money market accounts, and where do these fit into the range of risk with things like IRAs, mutual funds, and stocks?
A: Getting started can be one of the most difficult phases of saving and investing for retirement, but don't be paralyzed by the notion that you have to become an expert before you can get started. Here are some basic steps to get you going:
- Commit a portion of your weekly paycheck to savings. Don't worry if you don't have all the answers yet -- when you are just starting out, the most important thing is to begin accumulating savings.
- Start with FDIC-insured accounts. These are typically bank deposit accounts such as savings accounts, CDs, and money market accounts. Among these, long-term CDs offer the highest rates, but they also require that you lock up your money for a specified term. Savings and money market accounts are more flexible, which might be just the thing if you want to have an emergency fund available while you start to build up savings.
- Look into tax-advantaged retirement vehicles. These include employer-sponsored plans like a 401k, as well as plans you can set up individually, like an IRA. These can be invested as conservatively or aggressively as you want, but they do require a long-term commitment because there will typically be a penalty for taking money out before retirement.
- Start to learn about stocks and bonds. Eventually, you will probably want some of your retirement money invested more aggressively, so you need to venture into the world of more complex -- and riskier -- investments. However, if you don't want to become an expert, consider a fund where the manager handles the asset allocation for you, based on your risk profile and objectives.
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