Most of us don’t think about how much money we will need for retirement until we are close to retirement age. For many of us, we saw our parents retire adequately with a pension, Social Security, Medicare, and paid-off homes.
But, it will be different for subsequent generations as households are expected to take on more responsibility with respect to personal financial management. We now need to think about saving for retirement earlier in life so our investments have time to grow.
Time is a great asset for retirement planning! Even shoestring amounts of money, given adequate time, can grow to big sums thanks to the power of compounding interest. Compounding works because assets earn interest (dividends, capital gains) which, when reinvested, is added to the principal resulting in higher earnings. Don’t underestimate this power! Most Americans dramatically undervalue this “time value of money.” In a survey conducted by the Consumer Federation of America and Primerica, when asked how much $50 invested weekly for 40 years (at a 9% annual yield) would accumulate to, the median response was $239,400. Yet, this saving would lead to an accumulation of more than one million dollars — $1,026,853.
“Nearly all Americans have the ability to accumulate wealth if only they would make the commitment to do so,” said John Addison, Co-CEO and President of Primerica. “Simply by building equity through home ownership, taking advantage of an employer’s retirement options, and saving monthly, most families can build assets of several hundred thousand dollars during their lifetimes,” he added. A recent study indicated that a whopping 21 percent of Americans see winning the lottery as an important wealth-building strategy. Even more recently, a study found that one-third of Canadian female Baby-Boomers are hoping for a lottery win to fund their retirement. (http://www.retirement-cafe.com/Winning-a-Lottery-The-Retirement-Plan-with-the-Most-Bugs.html) “If Americans understood that their chances of winning a big lottery jackpot were 10 to 20 million to one but that they could accumulate hundreds of thousands of dollars through regular saving, more families would put the $50 away rather than spending it on gambling or unneeded consumption,” adds John Addison.
One of the most common ways to start this retirement savings is through an Individual Retirement Account (IRA). This is simply and an account that holds mutual funds, individual stocks and bonds, or bank products such as certificates of deposit (CDs) and money market savings. These IRA saving accounts have huge tax-advantages and makes it an ideal way to save for the years to come. There are different types of IRAs with Traditional, Roth and Rollover IRAs being the most common. With a Traditional IRA, you pay the taxes when you withdraw the money in retirement. With a Roth IRA, you pay the taxes before you invest the money. An IRA Rollover is the transferring of funds from a retirement account, usually a 401(k), into an IRA. This happens when a person changes jobs and wishes to take the account with them. An important fact about these IRAs is that the money grows tax free while it is in the account.
You can open an IRA through almost any large financial institution or it can be done online with a discount broker. For more information and education about these IRAs, I like The Motley Fool at www.fool.com. Open an IRA and then invest those dimes and dollars that are now being spent on too many fancy coffees and lunches out. Sit down with your family and put together a spending plan. First make sure that your living expenses are covered each month and then designate an amount that can go into your IRA. Keep it up and you will have a comfortable retirement.