Rule 1.
From the moment you start your career, you should invest a portion of each paycheck toward your future.
This should take precedence over extravagant living expenses and entertainment. Discipline yourself to
save money via payroll deduction or bank ACH into a 401(k) Plan, IRA/ROTH IRA or non-qualified
investment account. 401(k)’s, IRA’s and ROTH IRA’s can offer significant tax benefits in addition to the
potential for compound growth.
Rule 2.
15% is your annual savings goal going forward. By saving 15% of your annual gross income starting in
your 20’s and investing it wisely, at age 50 you will most likely be better prepared than the vast majority of
your peers. The sad reality is that many of your peers will just be starting to save and invest at age 50.
Unfortunately, time will not be on their side.
If you can’t afford to save 15% of your gross income each year, save what percentage you can afford.
Discipline is the key and time can overcome smaller savings rates. If your 401(k) does not offer a
matching contribution, save what percentage you can afford anyway. The savings benefit your future. In
addition, the funds are portable if you change jobs. If your 401(k) does offer a matching contribution,
don’t limit your contribution to the matching percentage. You need to strive for the 15% goal. Again, the
savings benefit your future.
Why you should save now*
Time is in your favor if you start saving at a young age. Compound growth is a powerful tool. As an
example, if you start saving $400 a month into an IRA or 401(k) at age 25 and assume a 7% growth rate,
at age 65 you will have amassed approximately $1,050,000. This does not include saving more as your
income increases. If you wait until you are age 50 to begin a savings program, you have lost 25 years of
savings and the corresponding compounding. As an example, starting a savings program at age 50 and
depositing $1,200 per month into a 401(k) with the same 7% growth rate, at age 65 you will have
amassed approximately $380,000
Bottom Line.
Do you think Social Security will be adequate for your retirement needs, or even be there? Are you
guaranteed to inherit a fortune? If your answers are no or I’m not sure, you need to prepare for the future
by establishing a savings plan at a young age.
Keep it simple…...save early and regularly, invest wisely and think long-term.
* This example is for illustrative purposes only. It does not include tax effects and should not be taken as specific
advice. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit
or protect against loss. Past performance is no guarantee of future results.
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