If only people in their 20s and 30s could temporarily transport themselves 30 or 40 years ahead and see what they could be up against one day, they would surely adopt a more responsible, effective plan to prepare for retirement. But human nature doesn’t always provide that kind of foresight. When people first begin to make enough money to take care of their bills and, additionally, spend to satisfy their immediate impulses, that’s exactly what they do. It is the rare individual who, at 25 years of age, can take seriously the contingencies to be faced 40 years later.
Practically everybody reaching an age at which retirement is in sight surely has one of two thoughts: either “Why didn’t I have the good sense to begin putting money away when I was just starting out?” or “I’m so grateful I got into the habit of regularly saving when I was young.” At that time in their lives, they could never have imagined how quickly the work years would pass. But it does indeed streak by at a rate that seems alarming when retirement approaches.
So, if you are now beginning a career, the best advice anyone could give you would be to summon your practical instincts and your self-discipline and get into a regimen by which you will prepare now for the eventualities of four decades hence.
If you’re either interviewing for a job or just starting one, listen to your boss go through the explanation of employee benefits. Don’t be either so dazed or disappointed at the salary and vacation package that you miss whether the company has a pension plan, a 401(k) or comparable investment plan, stock-purchase options, payroll deduction into a credit union account, and whether the company will contribute to any investment program offered. The payoff of these inducements might seem so far off into the future now that they merit barely a scant notice, but the time will come when they literally determine your lifestyle.
Here are some other pieces of advice as you embark on that journey on the superhighway from the beginning to the end of your career:
- Emphasize saving, whether it’s in conventional interest-bearing accounts, investments or something more complicated and sophisticated. Get into the habit of putting money aside for that distant goal of retirement, and don’t ever let it slacken, as long as you can afford it. It should be an integral part of your budget as long as you have income.
- Try to envision what you want in your retirement. All right, it’s a very hazy shadow right now, but, as you age, it will gain more and more clarity. If you have even a dimly lighted picture of what you expect in your post-work life, you will be better equipped to fund it.
- Learn about investing. Read, ask questions, take classes. The more familiar you are with your options, the more easily and effectively you’ll be able to steer your destiny. Remember that nobody cares as much about your prosperity and your future as you do.
- As soon as you can, start building a separate fund for emergencies. A regular savings account is secure. It pays modest interest and is the most accessible resource you can build.
- As needs present themselves throughout your life, try to satisfy them in ways other than tapping your retirement savings. Those funds should be your source of absolute last resort.
- Look into an individual retirement account (IRA). You can contribute as much as $5,500 a year, tax-free into a standard IRA until you are 50 years old, after which you can increase the amount. Learn about the relative advantages of a standard IRA and a Roth IRA. The former is tax-free as you invest and earn income; the latter is tax-free at withdrawal. Splitting your money so you have both is probably wisest.
- Understand and appreciate the value of compound interest on your investments. Along with gains in stock-market investments, compound interest is what allows you to make geometric gains without even looking. For example, if at age 25 you started investing $100 a month at 6 percent interest and kept it for 10 years, you’d have contributed $12,000 and it would have grown to $15,966. Nice gain. But, if you left it in your retirement account until age 65, the interest on it would have kept compounding — along with the compounding on the interest itself — and you’d wind up with $91,873. If you waited until age 35 to begin this process, at 65 you have $51,301 — tidy, but lots less than your nest egg, if you had been the responsible and farsighted 25-year-old. This astonishing math is why starting a retirement account early and leaving it alone is so important.
- It may still be early, but keep abreast of any developments concerning Social Security. As you age, keep an idea in your mind of how much of an income you’d be entitled to, considering your lifetime contributions and different ages of retirement. Social Security will be a fixed asset upon retirement around which all of your own investments will revolve. On average, Social Security retirement income amounts to about 40 percent of your pre-retirement earnings. Go to www.socialsecurity.gov for an estimate when it starts to become applicable.
Finally, once you have that retirement target in mind and you understand how important it is even at your tender age, keep exploiting your earning potential to give yourself the most prosperous retirement you possibly can. Don’t let the number of years between now and then deter you from providing the most comfortable and secure last several decades of life for you and your spouse. The calendar won’t slow down, and neither should your efforts to think ahead.
For more information on investing and preparing for retirement, talk with ALEC Investment Advisors. They can help you determine where you stand financially now, where you want to be in the future, and ways you can get there.
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