Saving and Investing for Retirement
saving and investing for your retirement can be complicated, in most
cases it doesn’t have to be. A simple, step-by-step approach can help
you build up an impressive sum with a surprisingly small amount of
effort and outlay.
The sooner you begin to set money aside for your
retirement, the longer your investments have to grow. By starting early
you have the most powerful force in mathematics working for you:
compound interest. With it, interest is calculated not only on the
deposits you make but also on the accumulated interest from prior
interest works best over time, which is why starting early is key. For
example, if you were to put aside $100 per month beginning at age 30
you’d have about $216,000 at 65, assuming an 8 percent annual return.
However, if you wait ten years, you’d have just $91,000 saved. The
difference in contribution amount is small: $12,000 ($100 each month for
10 years) but the actual difference in total savings is huge: $125,000
($216,000 minus $91,000).
Use dollar cost averaging
Dollar cost averaging is a technique designed to reduce
market risk through the systematic purchase of securities (stocks,
bonds, mutual funds, etc.). All you have to do is deposit the same
amount of money at regular intervals into well-balanced investment
accounts (typically mutual funds). If history is any indication of the
future, your investments will gradually but steadily increase in value
Maximize tax-deferred savings
If you have a defined contribution plan (such as a
401(k) or 403(b)) available through your employer take advantage of it!
Your contributions reduce your taxable income, the earnings grow
tax-deferred, and many employers match a percentage of what you put in.
You also have control over the investments, and most employers offer a
diverse menu of mutual funds from which to choose.
Retirement Accounts (IRAs) are another way to save and invest for your
future. You can open an IRA at just about any financial institution, and
once you do, you can begin to invest in just about any type of
are many types of IRAs, but the most common are the traditional and the
Roth. Contributions to a traditional IRA are tax-deductible, and the
earnings your contributions make won't be taxed until you withdraw that
money at age 59.5. Deductible IRA contributions, however, may be limited
based on your adjusted gross income or if you’re an active participant
in a 401(k), 403(b) or pension plan. There is no deduction for contributions with
a Roth IRA but if you meet certain requirements, all earnings are
tax-free when you (or your beneficiaries) take a withdrawal.
Diversify your investments
For safety and growth, you will want to make sure that your money is
diversified – some in cash, stocks, and bonds. How much you need in each
depends on such factors as your personal risk tolerance, years to
retirement, and overall investment goals.
can get a good mix of cash, stocks, and bonds through mutual funds.
These investment companies purchase a wide range of securities and sell
shares to the public. Because fund shares represent investments in many
different companies, shareholders are able to achieve diversification
easily, and therefore reduce their risk. You can further diversify your
nest egg by investing in funds of varying kinds.
Review your plan regularly
After you have developed a retirement plan, don’t walk away and forget
about it. Monitor your plan regularly, and review carefully at least
once a year. This way you’ll see if your investment strategy is working
for you, and you can make adjustments as necessary.
for retirement is too important to put off – which is why a simple
strategy is so critical. The more complicated it is, the less likely you
will take action. Once you’ve started, practice patience. For most of
us, saving enough money to retire on takes many, many years.