Planning Ahead: The Power of Retirement Savings

Whether you’re starting your first job out of school, or you’re well into your career, there’s no better time than today to start your retirement fund if you haven’t already. Why? Because every day you wait, you lose valuable time. Let’s use this for an example:

Say you invest $125 per month in a tax-deferred employer-sponsored retirement plan, and assume an 8% rate of return compounded monthly.

• If you start investing at the age of 21, you can retire at age 65 with $611,400 in your account.
• If you start investing at the age of 45, you can retire at age 65 with $74,118 in your account.

See why you need to start now? Just don’t be intimidated and think you need the brains of a Wall Street financial planner to start a retirement savings plan. They are not as complicated as you think. Here’s a quick overview:

401k plans

These are employer-based retirement savings funds that generally work like this: You designate an amount of tax-deferred income to be taken out of your paycheck on a regular basis (a percentage of your wages or salary) to be invested in your choice of stock market and mutual funds (from their chosen portfolio). The beauty of these plans is that most employers match up to a certain amount of your contributions. It’s not only a great deal, but it’s flexible. Should you leave the company, you can “roll-over” your account to a new plan—to the 401(k) plan at your next job, or to an IRA (see below), all without any tax implications.

Wondering how to get started? If your employer offers a 401(k) plan, simply ask how to join. Some companies require you to work for them for a minimum period (often six months or a year) before you can enroll. Once you are eligible, use their HR department or the financial planner that helps manage their fund for advice on how to choose your investment strategies within their portfolio—they can help you out.

IRAs

Your employer may not offer a 401(k) or you may want an additional investment source. Check out individual retirement accounts (IRAs), another great way to save for the future. There are a few different types of IRAs, but they generally work the same way: These tax-deferred retirement accounts are for individuals, and allow them to set aside up to $2,000 per year, with earnings tax-deferred until withdrawals begin at age 59 1/2 or later (or earlier, with a 10% penalty). Only those who do not participate in a pension plan at work or who do participate and meet certain income guidelines can make deductible contributions to an IRA. All others can make contributions to an IRA on a non-deductible basis. Such contributions qualify as a deduction against income earned in that year and interest accumulates tax-deferred until the funds are withdrawn. A participant is able to roll over a distribution to another IRA or withdraw funds using a special schedule of early payments made over the participant’s life expectancy. How do you start one? IRAs can be established at a bank, mutual fund or brokerage—use your phone or the Internet for help, or use a financial planner.