By Ben Lou
Q: I am a young person and people always give me advice to save for my retirement. When should I really start saving for my retirement?
A: Not very many young people think about this question until it is too late. Imagine that the more you save for your retirement, the more comfortable your life will be when you retire. Since making money has become tougher these days, most youngsters take a different approach and that is to live life first and worry about that part of life when its time. On the contrary, today is the time to think about it.
So, when should you really, really start saving for retirement? The answer is simple. As soon as you can! You should start saving when you first get out of college, find a job and begin earning paychecks. The sooner you begin saving, the more time your money has for it to grow from investments. Every year’s gains can add to the following year and so on. This idea is sort of interests making interests. This is called compounding, very much used by banks to maximize profitability.
Follow this example:
You start at the age of 25 and set aside $3,000 per year in tax deferred retirement account for 10 years. This $30,000 investment that you saved for 10 years by your age 65 will have grown to more than $472,000 based on economics.(Assuming an 8% annual gain). Given these numbers, why would you stop after 10 years? Keep it going!
Now if you did not save until the age 35 at $3,000 a year for 30 years, by age 65, you will have set aside a total of $90,000 of your own money. This $90,000 will only have enough time to grow to about $367,000 assuming same returns of 8% accrued gain.
See the difference. The longer it has time to accrue earnings, the more dollars you will have upon your retirement.
Here are some pointers in how to retire wealthy:
- Enroll in a 401K program if your company offers this program. If the company you work for offers matching 401K investments, you should take advantage of this. This is the company you work for putting free money towards your retirement. Mostly this matches ranges from 25-100% of your contribution, which sums up to about 6% of your salary. Even if the match is at 6%, that would immediately yield a 25% gain on your investment. Also, the money you put away in your 401K is excluded from your taxable income.
- Invest in a Roth IRA if your company does not offer 401K plans. Many small employers do not have the money or the manpower to offer a 401K plan. This means you have to create and manage your own retirement plan. A Roth IRA is a non taxed deducted retirement account. The up side is you can take it out and use it for any reason without penalties. Only the gains are taxable with this plan. If you do not take out any gains until 59 ½, those are tax free as well.
- Federal Student Loans. Don’t put so much money into trying to pay off federal student loans first versus putting money away for your retirement. If you are able to do both and still maximize putting away for your retirement, then it is ok. The interests are low enough on your student loans and they are tax deductible up to $2,500 in interests per year.
- Never cash out on your 401K. When you leave your present employer for a new one, you are given different options on what to do with your existing 401K. You can leave it where it is now, roll it to an IRA, roll it into your new employers plan or ask your employer to give you a check. Whichever you choose would be fine except for the last choice. Cashing it out, will give you a penalty and tax liability.
Many clients ask me if they should take cash out from their 401K to pay for their credit card debts. I always tell them that they will never get back the time that they had left that money invested again. I can help them get rid of their unsecured debts at a faster and lower monthly payment than what they have now.
Ating lesson, Laging magipon, dahil di masabi ang panahon.
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Ben Lou at your service! I have over 35 years of financial experience. If you would like sound financial advice, call us at Debt Aid Consulting International. We do not use call centers. No one has the right to put your information at risk.
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