Compound interest is one of the most powerful tools we have working for us.
For example: If an individual invests $100 a month for only10 years starting at age 25, that investment will result in $185,320 by the time that person retires at age 65, assuming a return of eight percent. However, an individual who invests $100 a month for 30 years starting at age 35, will only accumulate $150,030 by age 65. The first individual’s early investment has more time to compound and grow, and with the interest accrued during the early years, allows them to out-earn the second investor despite the fact that the second individual invested three times more money.
But before you put your money into just any retirement package, experts suggest careful planning and research to find a plan that meets your individual needs.
The U.S. Department of Labor estimates that to live comfortably in retirement (in a manner approximating your current lifestyle) you will need a plan that provides you with about 70 percent of your pre-retirement income — the amount of money you earn before you retire. For lower wage earners, that number goes up to 90 percent or more in order for you to maintain your standard of living when you stop working.
Experts suggest making direct deposits to your company’s 401(k), a tax-sheltered savings plan, if one is available. If a 401(k) isn’t offered at your workplace, you can invest on your own. An individual can put up to $5,000 a year into a tax-deferred Individual Retirement Account (IRA).
According to T. Rowe Price, investors over 50-years-old are allowed to make “catch up” contributions of an additional $1,000 per tax year to accelerate the accumulation of assets. Contributions can be made into a traditional IRA up until six months after you turn 70, at which time you must begin taking required minimum distributions from the account. However, penalty-free withdrawals can be made at age 59 ½, but these will be taxed as income.
Another option, especially for older investors, is a Roth IRA. The Roth IRA is much like a traditional IRA in that contributors are allowed to invest up to $5,000 and individuals who are age 50 or older are allowed to contribute up to $1,000 a tax year in “catch up” contributions. However, the contributions are NOT tax deductible.
One of the benefits of the newer Roth IRA is that it allows an individual who has been investing for at least five years and is at least 59 ½ years old, to make withdrawals from the account without taxes and penalties.
The Roth IRA has become more appealing in light of the estimated 42 percent of Americans who have calculated how much they need to save for retirement. Twenty-five percent of Americans who are offered 401(k) plans don’t participate, even though the average American spends 18 years in retirement.
But no matter how carefully you plan or how diligently you save, it will all be for naught if you fall victim to the temptation of dipping into your retirement piggy bank.
According to AllBusiness.com, your 401(k) should not be considered an extra bank account to be used when you need additional funds. It is the core of your retirement plan -- let it grow.
Another retirement pitfall is assuming that you can rely on Social Security. Social Security may help supplement your retirement income, but it will not be sufficient, and, the future of Social Security is not necessarily secure.
AllBusiness.com also warns against relying too heavily on your company’s stock purchase plans. Many people make the mistake of believing that owning a lot of shares in company stock indicates their loyalty to the company. It doesn’t. You should weigh the risks of owning company stock the same way you would evaluate the risks of any other stock. Spread your assets around.
The path to a comfortable retirement is straightforward, though admittedly difficult to follow. Do your homework. Exercise discipline in your spending. Start saving early, let your retirement savings grow, and never put all your retirement eggs in one basket.