Why Is Time So Important When it Comes to Saving?
A $1 million nest egg by age 65 — it’s a nice thought, but such a nest egg will not happen magically. Accumulating assets for retirement takes time and discipline. What are the keys to retirement security? First, it’s important to understand that your savings accumulation success depends on having a firm financial foundation in place, so in addition to accumulating assets you should have plans in place to protect or replace funds due to advents of risk, like disability or even loss of life.
Most successful retirement funds are built by making regular payments over time. Simply put, the sooner you begin to save for future financial needs, the better.
Can You Afford Not to Save?
Time can be one of your most powerful accumulation allies. To illustrate this point, consider the following hypothetical example. Your objective is to accumulate $1 million for retirement by age 65. If you are 25, you will need to make at the beginning of each year an annual contribution of about $6,100, assuming a 6% return. That’s about $500 per month. However, if you wait until age 45, you will need to save over $25,000 a year or approximately $2,100 per month to reach your goal. (This is a hypothetical illustration and is not intended to project the future performance of any particular product.) Although this example is basic, it proves a valuable point: postponing saving until later in the game will force you to dramatically increase your saving habits. This is a difficult task, even for the most disciplined people.
Where Do You Begin Building a Retirement Portfolio?
Pay yourself first. If you do not currently participate, the first place to begin accumulating savings for retirement is your employer-sponsored qualified retirement plan (401(k), 403(b), etc.). Utilizing your employer-sponsored qualified retirement plan presents a tremendous opportunity for you to get a jump on retirement. Some employers will match employee contributions on a dollar-for-dollar basis, while others may contribute a smaller percentage. Either way, taking advantage of the current tax deductions and the ongoing tax-deferred compounding of earnings makes smart investment sense.
You can also invest up to $5,5001 in an IRA in 2013. If you’re 50 or older, that amount is $6,500 for 2013. If you do not currently participate in your employer’s qualified retirement plan and if you meet certain income limits, your contributions to a traditional IRA are usually fully tax deductible. This deduction will reduce your taxable income and your current income tax bill. Alternatively, the Roth IRA may be the right choice for your retirement funding. Some advantages of a Roth IRA include:
• Tax-free accumulation and an entirely tax-free distribution, provided that five years have passed since the first year in which a contribution was made, and you are over the age of 59 ½
• Eligibility for contributions at a higher earned income level compared to traditional IRAs
• No mandatory withdrawals during your lifetime
• The ability to continue making contributions after age 70 ½ if you’re still earning income
• IRS penalty-free withdrawals in a variety of circumstances (same with traditional IRA)
• The ability to contribute to the Roth IRA even if you already participate in an employer-sponsored plan
If you do participate in your employer’s qualified retirement plan, your deduction for your IRA contribution may be reduced or eliminated depending on your annual adjusted gross income. Even if your contributions are not deductible, you should still consider making a yearly contribution because the money earned in the account compounds tax-deferred.
Typically, withdrawals of earnings will occur in retirement, when you will probably be in a lower tax bracket. Depending on the type of IRA, withdrawals may be taxable and, if you are under age 59 ½, may be subject to a 10% tax penalty.
How Do I Start Funding for Retirement?
Consult your advisor or if you’re in NY or NJ, find and contact us if you don’t currently have one and make the first step towards your future financial security.
Information provided has been prepared from sources and data we believe to be accurate, but we make no representation as to its accuracy or completeness. Data and information is provided for informational purposes only, and is not intended for solicitation or trading purposes. Please consult your tax and legal advisors regarding your individual situation.
Posted by Troy Barrow, LUTCF – Troy is an independent Agent practicing professionally for six years and is the owner of Arlington Insurance Planning Services, licensed in the States of New York and New Jersey. You may contact Troy at 646 580-5189 or tbarrow@aipsny.com.
Arlington Insurance Planning Services 