The Trick to Saving for Retirement Even When You're Really Broke, According to Suze Orman

It’s understandable if young workers put off saving for retirement, focusing on student debt payments and other immediate bills instead of a hazy goal way in the future.

But is it excusable? Not really, says Suze Orman, the personal finance expert and host of the Women & Money podcast. The best time to start saving for retirement is when you’re just starting out in your career, when you have time on your side and can take full advantage of the power of compound interest, Orman said during a talk at Money's parent company Meredith on Monday.

“These are your compounding years--you can’t afford not to save,” Orman says.

Luckily, there’s a “an extraordinary investment vehicle” that can do double duty, helping young people build an emergency fund and save for retirement at the same time, Orman says: the Roth IRA.

The Roth is an individual retirement account whose contributions are taxed on the way in, not on the way out like those of a traditional IRA or 401(k). That means you won’t get a tax break on the money you contribute when you’re working. Instead, you'll reap the rewards in retirement when you have a big pot of savings that Uncle Sam can’t touch (barring a major change to the rules).

Money in a traditional IRA or 401(k), by contrast, is subject to income tax when withdrawn in retirement. What’s more, you can’t touch the money in your traditional IRA or 401(k) until you’re age 59 ½ under most circumstances without paying a 10% penalty.

You can withdraw your Roth IRA contributions at any age without paying a fine, and that’s why the Roth IRA can double as your emergency savings fund, Orman says. She recommends that people save eight months’ worth of living expenses for a rainy day, like if you lose your job or become too sick to work.

Keep the emergency fund portion of the account in cash, Orman says, noting that a Roth is a “house” for your money that includes broad investment options, including cash, CDs, mutual funds and and individual stocks and bonds. Once you’ve got eight months’ worth of living expenses saved up, start investing your new savings in the stock market, she says. You can open up a Roth IRA online with a brokerage such as Fidelity, Charles Schwab, or TD Ameritrade. (Note: single people making $137,000 or more and married people filing jointly making $203,000 or more are not allowed to contribute to a Roth IRA.)

What’s the advantage of parking your emergency savings in a Roth, versus a regular savings account? The IRS caps Roth contributions. For 2019, the limit is $6,000 for people under age 50. So you won’t be able to catch up at age 30, for example, and deposit $30,000 all at once to make up for the money you didn’t contribute between age 25 and 30.

You’re going to want as much money as possible in your Roth at retirement, so you should start funding one as early as possible, Orman says. And if you’re lucky and don’t encounter any big emergencies, that money stays put and becomes part of your tax-free retirement fund.