Saving for Retirement: Start Early

by Amy Nutt

Saving for retirement is something that everyone needs to consider, as it is an important long-term goal. Every working person, no matter how old he or she is, will eventually reach retirement age. Once you person retires, they will no longer be earning the income that they were accustomed to receiving every pay period. In order to deal with that loss of income and still be able to pay bills, maintain their lifestyle, and survive in general, every working person needs to plan ahead.

Time is on Your Side

The earlier you start planning and saving for your retirement, the better. If you are in your 20’s or even your 30’s, retirement may seem far away, and you may think you don’t necessarily need to worry about it at this point in time. You may find yourself juggling many competing priorities that require time and money. You may even think that there is plenty of time for the American government to fix the social security system so that it can actually take care of you when you retire.

Well, while an optimist may hope for such a positive outcome, the truth is, the social security system is not designed to take care of all your financial needs after retirement. The best thing to do is to save for your own retirement. If you are young, you are in a perfect position to maximize your savings for a much better potential outcome. That is because you have time on your side. Time, when combined with money, is a very powerful tool. First, there is the obvious -every year you save for retirement is another year’s worth of savings to add to your egg’s nest. Of course this has plenty of value in itself. For example, if you save $3,000 every year for 20 years, versus saving the same amount for only 10 years – well, do the math. More importantly, however, is the value that compounding adds to your investment.

Compounding

Compounding can be explained simply as the ability of your investments’ earnings to earn additional earnings by automatically reinvesting all interest, dividends and gains. Confused yet? Basically, compounding multiplies the growth of your savings by earning interest on interest earned. Suppose you save $10,000 in an interest-earning retirement savings account. Imagine that the first year, the account earns 20% (granted, this is beyond optimistic, but stay with us). Your investment is now worth $12,000. Since this is a retirement account, you don?t touch it. In Year 2, the shares appreciate another 20% (this is just an example). Therefore, your $12,000 grows to $14,400. Rather than your shares appreciating an additional $2,000 (20%) like they did in the first year, they appreciate an additional $400, because the $2,000 you gained in the first year grew by 20% too. If you continue to work the process out, the numbers can start to get very big as your previous earnings start to provide returns. In fact, $10,000 invested at 20% annually for 25 years would grow to nearly $1,000,000 (and that’s without adding any money to the investment)!

Tax-deferred Growth

Another very important reason to start saving for your retirement as early as possible is the tax benefit that you will enjoy. Most retirement savings account, whether they are IRA’s or employer sponsored programs, are tax deferred. This means that the tax you would normally pay on the portion of your income you contribute to your retirement savings is essentially given to you tax-free. This makes a huge difference when combined with compounding. As you can see, there are many benefits to start saving early for your retirement, but don’t forget – it’s never too late.

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