The cost of waiting

Have you begun saving for retirement? Understand the impact of not starting early enough

Have you begun saving yet for your retirement? Putting away even a small amount each month can make a huge difference when you’re ready to retire.

More years, more money

The good news is, odds are, you’ll probably live longer than past generations. The bad news is, living longer means you’ll need more money for retirement — possibly up to 30 years’ worth.

You can’t expect to spend less on living expenses in your Golden Years than you do today. Most financial professionals agree that you’ll need 70-80 percent or more of your pre-retirement income to maintain your lifestyle in retirement.

The cost of retirement living will increase if the cost of health care, housing, energy and other costs increase. Inflation can also damage the purchasing power of your retirement dollars. For example, if you project a 3% inflation rate over the next 25 years, a gallon of milk purchased today for $3.49 will hypothetically cost you $7.31 in 2038.

Save now, pay later

One way to begin saving is to use your employer-sponsored retirement plan, such as a 401(k), 403(b) or 457 Deferred Compensation plan. Such plans can help you save money.

Here’s how:

  • Less tax today: Contributions to your plan are made prior to income tax deductions, which means you’re paying less in current taxes from each paycheck.
  • Potentially less tax tomorrow: Your account grows tax-deferred, meaning you won’t pay taxes on it until you withdraw funds from the plan. If you are in a lower tax bracket at that time, you will likely pay less in taxes than you would today. (Note: Penalties will apply to early withdrawals — usually before age 59½, unless an IRS exception applies.)

Your money is your money-maker

When you invest in fixed credited interest rate accounts, you earn interest on your money. And then that interest earns interest. That’s called compound interest, and it’s how your account grows over time.

Compounding circumstances

Liz and Jenna, both 25, started work for the same employer on the same day. Liz began making a monthly contribution of $100. Jenna chose to wait another 10 years before contributing to the plan. Liz stopped investing after 15 years, while Jenna continued to invest $100 a month until she retired at age 65. Both contributed $100 a month, totaling $1,200 each year. Both earned a 6 percent rate of return on their investment. Liz invested for 15 years and a total of $18,000; Jenna invested for 30 years and a total of $36,000 — more than double Liz’s investment. Yet Liz still came out ahead. (See chart.) That’s the power of compounding. Remember, this is simply an example of how compounding interest could work for you. Your actual results may vary.

Compounding

The cost of waiting graph

This illustration does not reflect the performance of any specific investment. The returns are hypothetical not guaranteed and do not reflect the past or future performance of any specific investment option. Payment of income taxes is not reflected.

Note: This hypothetical illustration is based on an annual effective rate of return of 6% and does not reflect the performance of any specific investment option. It does not take into account the payment of taxes and does not intend to predict investment results. The illustration does not include fees or expenses that an investment product could assess. If included, these fees would reduce the figures shown above. Systematic investing does not ensure a profit or guarantee against loss. You should consider your ability to invest consistently in up as well as down markets. Not intended to serve as financial advice or as a primary basis for your investment decisions. Taxes are generally due upon withdrawal.

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This material is provided for general and educational purposes only; it is not intended to provide legal, tax or investment advice. All investments are subject to risk. Please consult an independent legal or financial advisor for specific advice about your individual situation. 

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