Retirement Investing ... Start Early, Contribute Often!
When it comes to retirement investing, the cardinal rule is start as early as possible! The more you invest and the earlier you start, the more time your retirement savings will have the potential to grow in value. No one knows where the social security system will be 10, 20 or 30 years down the road, so planning for your golden years should start with you and not rely on the government. In the column below we will share some insights on retirement planning.
Getting Started Early ‐ Time Matters
The main benefit of retirement savings accounts such as; IRA’s, Roth RIA’s, 401(k)s and SEP IRA’ is the unique opportunity for your investments to grow tax‐deferred. The money you invest in these vehicles is tax‐deferred, which means taxes are not payable until you withdraw the money from your account. The ability to not be taxed year after year on your investments (at least until you withdraw funds) allows you investment to grow faster as you principal base in larger without being taxed.
When combined with compound interest, the money you would have otherwise paid toward income tax, which remains in your account to earn more money the growth rate is more exponential.
Additionally regular contributions, even modest ones, also add up! For example, just $50 a month added to your retirement account with the magic of tax deferment and compounding interest could generate as much as $75,000 over 30 years.
In the table below we look at three regular, monthly contribution amounts and the associated returns over time. Note we bolded the last column to emphasize how time matters!
Table 1 ‐ Varying monthly contributions and compounding returns.
The High Cost of Waiting
As the old adage goes, "There is no time like the present!" Certainly when it comes to investing that statement rings loud and true. In fact, it is indisputable that the longer you wait to invest the less time your investments receive the benefits of compounding returns.
To put it in a dollars and cents perspective, let’s examine the following scenario:
Let’s assume the following:
You earn $30,000 a year, receive 4% annual raises and plan to retire in 30 years.
You save 4% of your salary a year and earn an 8% annual return.
If you start investing today, you could have more than $220,000 by the time you retire.
If you wait even five years before starting your retirement investing, you’d have $164,878, assuming the same compensation factors above. So literally waiting five years could cost you $56,066!
This material is intended presented for educational purposes only and should not be used or relied upon to make investment decisions. Any references to returns are not to be relied upon as past returns may not be an indication of future returns.
Investors should carefully consider their personal investment objectives, risks, charges and expenses. Investing can result in the loss of some, or all of your principal, please consult a financial professional before investing.
*Hypothetical returns of 8% used this illustration are based on the long term average return associated with US equity as supplied by numerous industry publications and academic studies.