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Basics of Saving & Investing
: Investment Choices
The Key
to Retirement-Planning Success: Start Young
Basics of Saving &
Investing : Investment Choices
Most people have to work for their money. And once they have earned
it, they have an important choice to make:
spend it all, or set aside some money so it can work for them.
Whether your income is small or large, setting aside some of it
for investments requires self-discipline. You decide to postpone
buying certain things you'd like to have now in order to enjoy the
longer term benefits of having your money work for you through savings
and investments. The current savings rate of households in the United
States on average is less than four percent of income after taxes.
Teenagers and adults who begin the savings habit early are more
likely to have money available for things they want in the future.
Making your money work for you is what saving and investing is
all about. You can measure your investment success by keeping track
of how well you make your money work. Is your net worth increasing
over time? Is inflation robbing you of the buying power of your
savings dollars, or are your investment earnings staying ahead of
the inflation rate?
Unit Objectives
Discuss reasons to save and places to accumulate savings.
Identify and describe common investment options. List factors to
consider when selecting savings and investments. Describe the "time
value of money" concept and demonstrate its usefulness for
investors.
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The Key to Retirement-Planning
Success: Start Young
"I wish someone had told me to start putting away just $2,000
a year when I was in my 20s. "That's what many older women
chant these days. The reason: Like most women, they didn't start
thinking about their retirement planning until they had suddenly
reached their 30s or 40s and realized how much valuable time they
had lost. Yes, it's difficult to think about retirement when you're
young. For one thing, it's hard to believe you'll ever be as old
as 40, much less 59 or 65. For another, you have plenty of other
financial pressures to contend with: paying down your student loans,
managing your credit card debt, saving for a down payment on a car
or just managing to cover the rent each month. But while all that
may be true, it's also true that if you start saving for retirement
now, you have the best shot at attaining long-term control over
your finances and ending up your life in comfort.
Watch the Money Grow
Just watch what happens if you open an individual retirement account
now and start contributing to it each year. (If you need to learn
more about how to work with IRAs check out, IRA:Traditional or Roth).The
first year you open an IRA you'll invest $2,000, which is the maximum
annual contribution. That $2,000 will be invested in mutual funds,
stocks or bonds that will provide a return within the IRA account.
By the end of the first year you'll have the original $2,000 investment,
plus any income it has earned. Now you've got $2,000 earning interest
plus interest earning interest. And on top of that you'll make another
$2,000 contribution the second year. The entire sum will earn interest
and so on. By the time you hit retirement age (59 1/2 or later),
all those contributions and interest will be worth much more than
the original amounts you deposited, thanks to the power of compounding.
For example, if you start making annual $2,000 contributions at
age 25, you'll have contributed $70,000 by the time you retire.
But at a 10 percent rate of return, you should have $540,049 in
your account at retirement age, according to a calculator in Wells
Fargo's Website . The site calculates the after-tax value of IRA
investments, so depending on whether you're investing in a Roth
IRA (which requires you to contribute after-tax dollars but allows
you to make tax-free withdrawals after retirement) or a tax-deductible
IRA (which allows you to contribute pre-tax dollars but which requires
you to pay tax upon withdrawal at retirement), the after-tax value
of your retirement nest egg will be slightly different.
If you start investing in an IRA after age 25, your money will
have less time to compound before retirement than if you'd started
earlier, but that doesn't mean you should abandon your savings plan
if you didn't start at 25. Even if you start investing $2,000 a
year at age 34, you'll still have more than $200,000 at retirement
age. But note that the difference between starting at age 34 and
starting a decade earlier is more than $300,000 at retirement. It
pays to start as early as you can. It also pays to get the highest
rate of return you possibly can. While 10 percent is the historical
average return from investments in the stock market, you cannot
always guarantee that your IRA will pull in a steady 10 percent.
But that also doesn't mean you should abandon ship. If you get an
8 percent rate of return on your IRA investments between ages 25
and 60, you'll have about $345,000 in your account, according to
a calculator provided by the Vanguard Group.
Another strategy for increasing your retirement nest egg is to
put off the age at which you retire. In the above example, earning
an 8 percent rate of return, you'll have more than $518,000 if you
retire at age 65 instead of 60, according to Vanguard's Website.
That's because your money gets the greatest benefit from compounding
at the end of the time it's in your account, because that's when
there's the most money to build on. And no matter when you start,
the compounding effect will mean your money will multiply into quite
a tidy sum by the time you retire.
Keys to Retirement Success
Start early: the younger you are when you begin contributing to
your IRA, the longer your money will have to compound, making it
worth even more when you retire.
Contribute every year: Even if you're tempted, don't skip your
IRA contribution. Give your money the best possible chance to grow
by socking away a little bit every year.
Resist the temptation to withdraw the money early: You'll have
to pay a penalty of about 10 percent and your retirement nest egg
will be that much smaller.
Aim for a high rate of return: The more your money earns annually,
the more you'll have at retirement.
Leave the money in longer: Money gets the greatest
effect from compounding in the later years, so the longer you can
leave it in your account, the more you'll have when you withdraw
it.
This article was taken from
iVillage.com...thank you iVillage!
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