Making the Most Of What You Have
What people want at retirement is simple...the time and money to enjoy the activities they
only imagined before. Retirement usually assures the time - but what about the money?
Trends toward entering the work force at later ages mean the retirement savings
accumulation period may be shorter for many people. And, the common practice of delaying
child birth means fewer years to financially recover from college expenses to prepare for
retirement. Combining these factors with earlier retirement and longer life expectancies
creates a real dilemma: fewer years to fund retirement goals, yet greater financial needs.
How do you save for retirement in less time?
The Power of Compound Interest - Start a retirement program as early as possible.
Compounding is dramatically more effective over time, especially when you accumulate a
tax-deferred savings.
Diversification - Consider the number of years to retirement when allocating
assets among investment alternatives. In general, experts advise people with several years
until retirement to allocate a larger percentage of assets among higher risk/reward
categories. As they move closer to retirement, the asset mix should be more heavily
weighted toward more conservative options.
Wise Decisions - Make choices between luxuries now and retirement needs later.
Examine your wants and needs closely. Having less time to accumulate retirement savings
underscores the importance of preparing more carefully. Less can mean more if you're
willing to rise to the challenge!
Make Your Retirement Planning a Priority
Every time you turn around, there are immediate financial needs...things that just can't
wait. Paying your mortgage, meeting car payments and funding your child's education all
take priority. With all of these day-to-day needs competing for your limited funds, it's
hard to find the resources - and the motivation - to plan for retirement. But
if nothing else, the cost of waiting to plan for your retirement is a strong motivator.
Consider this example:
Bob and Bill each plan to make a $5,000 annual retirement contribution for the next 20 years. However, Bob starts at age 25, while Bill starts at age 45. Each of these $5,000 contributions earn a 7% annual interest rate and income taxes on the earnings are subtracted at the end of each year (assuming a 28% tax bracket). Because of the impact of compound interest over time, the difference between what Bob and Bill have for retirement at age 65 is significant: In fact, Bob would have an accumulated value of $446,268, while Bill would accumulate $174,398.
The results are even more dramatic if Bob also chooses a tax-deferred retirement funding vehicle earning a 7% annual interest rate (taxes on the earnings are subtracted at age 65 assuming a 28% tax bracket). Taxable contributions from age 25-45 would accumulate $466,268 at age 65, while tax-deferred contributions would result in $639,080 (subject to tax when withdrawn).
You really can't afford to wait for the "right time" to start planning for your retirement. If you plan early and take advantage of tax-deferred tools, you'll have a better chance of making your retirement goals a reality.
