It has always been a good idea to plan for a comfortable retirement and save for it as early in one's career as possible. In today's rough and tumble economy, early planning and saving is even more essential. The busted housing bubble has robbed 60% of the American family's equity in their home causing a reduction of over $100,000 for an average family of four. Social Security certainly can't be depended upon no matter what changes the politicians make to it. It is very apt to crumble due to lack of funding. People's incomes are either remaining the same or heading south, making saving any amount difficult, if not downright impossible.
Whether that common scenario defines the status of your personal finances or not, the prevailing uncertain conditions, inflationary pressures, potential tax hikes, and a weaker dollar ensure that no one is immune to the broad forces at work in the global economy today. Only the third little pig who builds his financial house of brick has a good chance at surviving and thriving when it's time to retire. That takes knowledge and planning to accomplish.
Begin Early
It's never too late to start saving for retirement, but the earlier you start, the bigger advantage you will get from the power of compounding. With your 30-year mortgage, you know how the small principal pay-down in the early years gradually gnaws away at the huge balance, until eventually your monthly payment becomes mostly principal and less interest. Saving works the same in reverse.
Suppose you get an 8% return on an investment annually, your original cash outlay will almost double every nine years. In 30 years, a $1,000 investment will be worth approximately $10,000. If you added $1,000 fifteen years ago, the compounding would not even bring half that amount, it would be worth around $3,000. The $1,000 invested ten years ago would be worth a mere $2,000 and after five years, about $1,400. The later years of the investment period is where the wonders of compounding are the most obvious as the numbers grow ever bigger and bigger every year.
The Advantages of Tax Deferrals
You can see that if you are compounding only $700 or $800 a year instead of $1,000, as in our example, you would end up with tens of thousands of dollars less in the pot of gold at the end of the rainbow of your career. That's what happens if you invest only post-tax dollars instead of pre-tax dollars. IRAs, Roth IRAs, 401(k)s, 403(b)s and other opportunities the government gives you to defer taxes should be taken advantage of, to the extent that it is possible for you.
This will lower your taxable income now, and every $100 you put into a tax deferred account instead of giving to the IRS today could be another $500 or $1,000 you have when you retire. You will have to pay tax on the money as you withdraw it after retirement, but chances are your income level and tax rate will be less then. Tax deferrals are a 'win' now and again when you retire.
More Things to Consider
It can become a complex equation to balance your budget and needs for today with plans and expectations for your future, especially as career changes and the curve balls of life (like marriage, kids, college, divorce, and unexpected occurrences) continually change the landscape of the present and the needs and desires for your future.
It is very important to deal appropriately with employer matching contribution, rollovers and beneficiaries and to choose the right type of funds; long-term, short-term, treasuries, growth, income, gold, college funds, insurance, mutual funds, monetary funds. There are lots of things to stay on top of in an ever-changing and volatile market place and nervous economy. You know what your needs are, your financial guru is the expert on matching those needs to investments to plan the optimum financial future for you.
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