Advice from Labib: What are the advantages of saving sooner?
Advice from Labib
What are the advantages of saving sooner?
Most people have good intentions about saving for retirement. But few know when to start or how much is enough. Far too many people use credit cards as an additional income source and sink further into debt. This leaves precious few dollars to put aside for savings and retirement. And the interest on credit cards builds up much faster than interest on a savings account.
Of all workers, more than one-quarter have saved less than $10,000 for retirement.1 A better approach might be to allocate a certain amount for savings every month and pay yourself as though it were an expense.
Let's look at two friends, Chris and Leslie, who are both 45 and saving for retirement 20 years from now. Their financial advisor has told them that they need some savings in addition to their employer-sponsored retirement plans. Both save $275 a month for a 10-year period, and both earn 8 percent on their investments. But there is a difference.
Chris starts saving today and saves for 10 years. But Leslie waits 10 years before starting to save. Both will have put away a total of $33,000. After 20 years, Leslie, the procrastinator, will have accumulated $49,534, whereas Chris, the early starter, will have accumulated $106,941. That's more than twice as much available for retirement with the same initial investment.
(This is a hypothetical example used for illustrative purposes only and does not represent the performance of any specific investment. Rates of return will vary over time, particularly for long-term investments. Taxes and inflation were not considered. Actual results will vary.)
This example makes a strong case. Not only does it pay to save, but if you start sooner, you can take advantage of the power of compounding. For example, your deposits earn interest and so does your reinvested interest. This is a good example of letting your money work for you. The sooner you start saving for retirement, the more you will have when you retire. And the sooner you start saving for retirement, the sooner you will be able to retire.
If you have trouble saving money on a regular basis, you may try savings strategies that force you to save. Examples of forced savings strategies are whole life insurance, employer-sponsored retirement plans, and direct payroll deductions. These financial vehicles allow you to take your savings directly out of your paycheck as an expense. This means you'll be paying yourself even before your creditors. Some of these options, such as whole life insurance and employer-sponsored retirement plans, may also have deferred tax advantages that further increase the advantage of saving early.
Distributions from a tax-deferred retirement plan, such as a 401(k) plan, are taxed as ordinary income and may be subject to an additional 10 percent federal tax penalty if withdrawn prior to age 591/2.
Source: 1. 2002 Retirement Confidence Survey, Employee Benefit Research Institute
Alfred Labib is an Independent Financial Advisor. "Our Goal Is To Help Investors Grow And Preserve Their Wealth Through Discipline And Process." 301-824-4523, www.labibfinancial.com.