I don’t think I need to tell you that for the generations that will follow the Baby Boomers into retirement, Social Security will be a distant, quaint memory. The truth is, I believe young people recognize how important it is to invest in a 401(k), however, how many of these younglings recognize the value in saving now rather than later? According to a new report, “401(k) Plans Are Still Coming Up Short,” from the Center For Retirement Research at Boston College, only 62% of people ages 20-29 participate in employee 401(k) plans.

Now I know what you’re thinking, “But I don’t make enough to contribute to my company’s 401(k)!” and my answer to you is this: you can’t afford not to. Most companies match fifty cents to your dollar for up to 6% of your contributions and that, dear friend, is what we call free money. When these contributions are deducted from your paycheck pre-tax, it’s hard to even miss what wasn’t there to begin with. Ya dig?

Money Crashes puts it in this respect:

if you started contributing to $100 a month to your retirement account at the
age of 25, and you were going to retire at the age of 60, then your account
would reach $379,000. If you started saving for retirement at the age of
35 with the same contribution, then you would have just $132,000.

And that scenario doesn’t even account for company contributions! Bottom line and common sense dictate: the sooner you begin to invest, the longer amount of time your money has to grow based upon your employer’s (or your own homegrown) portfolio mix. This has an impact on your bottom line when the gains from each year build upon the previous year’s balance (compounding interest at work).

Diversify
When you begin to invest at an earlier age, it also enables you to take more risk. The volatility of the market will have less negative impact on your balance, in the long run, and can actually work in your favor. In order to save enough money to live work-free, you will need the monetary growth that stocks are capable of providing. According to CNN:

From 1926 through 2006, stocks – broadly speaking, using the S&P 500 index
as a measure – have posted an average annual return of 10.4 percent versus just
5.9 percent for bonds, according to Ibbotson Associates.

CNN.comHowever, before you rush out and put all your money on the company is providing timeshares for your dog (the next big thing, I swear). You should consider stock funds as opposed to individual allocation. Money Magazine provides an excellent allocation plan that diversifies and ensures stability (see left). Additionally, I recommend checking out this helpful tool Retirement Calculator, which can be incredibly eye-opening…and a little stress-inducing.

Different types of accounts:
Now that we’ve gone over the basics here are a few different accounts broken down to a very, very basic level.

401(k)- this is the plan offered to you through an employer
Traditional IRA- provides tax-deferred growth, which means you pay your taxes on the investment gains only when you make withdrawals. Furthermore, based upon your qualifications, your contributions may even be deductible.
Roth IRA- contributions are not tax-deductible but when you withdraw your gains, you don’t owe Uncle Sam any tax.
Roth 401(k)- provides no up-front tax deduction, so your contributions won’t reduce your current taxable income. But all the money you withdraw is tax-free as long as the funds have been in the account for at least five years and you are at least 59½ years old.

No matter what you decide to do, all I can reccommend is extensive research and utilizing the tools that are offered to you. Best of luck dear friends and let me know if you ever buy that shiny black Aston Martin!

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