If you’re still wondering if you should start saving for your retirement, the answer is YES. For those of us nearing retirement age today, Social Security is guaranteed. But the next generations–and even the current ones–may not have it.
It’s best to start saving and investing now. You probably still have the most valuable asset in financial planning–time. In most investment plans your returns are added to your total investment. The result is compound growth–a larger growth rate the longer your money remains invested. With early investing, say, starting at age 25, you will have 45 years over which your investment will continue to appreciate despite the rise and fall of the market.
An individual retirement account (IRA) is available to the investor when 59-1/2 years of age. In a standard IRA, you are not taxed at the time of your initial investment, which legally can be as much as $2,000. However, you are then taxed when the money is withdrawn, which includes all of your interest earned over the year. Remember–there are steep penalties if you choose to withdraw early from this type of account.
The second type of IRA is called a Roth IRA. With this type of investment, you are taxed presently, so with a $2,000 initial investment, depending on your tax bracket, you might end up paying somewhere around $180 in taxes. Upon reaching 59-1/2 years of age, you would then be able to withdraw your investment, tax-free. If this were a standard IRA, upon withdrawal of your investment you would then pay taxes on it. As an example, if your return is $12,000, you would pay in the neighborhood of $1,460.
The fact is, if you invest in your IRA every year for 10 years from the ages of 25 to 35, and then do not invest another dime, you will have more money at retirement age than if you invested from the ages of 45 to 65. Clearly the numbers stack up to your advantage when you begin investing early.
I realize that finding $2,000 extra a year could be difficult for many of us. But remember that $2,000 is the maximum amount allowed by the IRS. There is NO minimum. The key is to begin–and that means today, if possible, because as every day slips by, you’ve lost interest that can never be gained back. In addition, some companies waive their minimum investment for opening an account, if you do a direct monthly draft from your checking account. This can be as low as $50 per month.
An IRA can be in most any investment strategy. All one has to do is designate it as an IRA. And there are other investment options. Your bank may offer certificates of deposit (CDs). Mutual funds are another type of investment. With mutual funds, an institution plays several stocks on the market. These are usually diversified and are a fairly safe way to invest. Or you may choose to play the stock market directly. I recommend contacting your financial institution, having a look at their prospectus, and doing a certain amount of research before doing any actual investing.
You have worked long and hard, building and establishing your career. With a little foresight you will be able to spend your retirement years in comfort, poring over your old recordings.
