Retirement investing is one of the key aims of many Americans. If it is not one of yours, then it should be. The younger you are, the less probable that Social Security will be available when you retire or the age to draw it’ll be set quite high, and many people won’t reach it.
Originally, when Social Security began, the life expectancy of the average American was so early that those that reached retirement age often died soon after drawing their first Social Security check. As the retired population grew and lived longer, the pay as you go system of Social Security had to increase the intake to provide for the retirees. It won’t be long before the system feels the entire brunt of the retiring baby boomers when they outnumber the working population. If you think it sounds like trouble brewing on the horizon, then you are probably right.
So, what can people do to protect themselves? They could make certain they have sufficient resources so that they have adequate sums of money to live on their own in retirement. Even though the Social Security picture sounds gloomy for the young, retirement investing is easier the younger you are, so that offsets the gloomy image already раіntеd.
The key is time. The younger you are, the more time you have to make annual contributions to a retirement plan. This cuts the amount that you have to invest to achieve the same goal as someone 20 years your senior. The extra time also allows interest or investment gains to perform their magic on your money.
If you’re age 20 and saved $2000 annually until you reached the age of 65 earning 4% return, you’d have $251,000 by the time you were 65. $90,000 could have come from your investments, but the other $161,578 came from interest on the money you saved. A person age 50 retirement investing the same $2000 would have only $41,000 with $30,000 from their pocket but a measly $11,015 from interest earned. You can see that time is a massive advantage for personal savings, although Social Security might sound bleak.
Another advantage of retirement investing early is that you have an opportunity to use investments that are more volatile. The closer you reach your financial goal, the less risk you should take when you invest your funds. The more risk you take, the greater the return potential. People who are close to retirement or at retirement age normally have to select investments with fixed and often low returns. Young people have the opportunity of investing more of the money in the stock exchange, and should because it keeps up with inflation. If inflation runs high, it erodes the purchasing power of your money. Individuals are only receiving a 3 percent return on their dollar lose purchasing power if inflation is at 4%.
There are lots of types of investment vehicles for retirement investing. Company sponsored plans such as thrift accounts, traditional pension plans, SIMPLE plans and the popular 401(k) are the easiest way to save. Teachers and people who work for the non-profit company can use 403(b) plans. Government workers and teachers can use 457(b) plans to save for retirement. While the letters might seem confusing, each one permits you to put aside funds that the government normally taxes, into a tax-deferred account that receives tax-deferred interest.
You can also do retirement investing with traditional and Roth IRAs, mutual funds and annuities. While the mutual funds have no tax savings, they are easily available if you want them for emergencies. The Roth will not save tax dollars in the year you invest, but you never pay taxes on the growth. Annuities give tax relief on the growth until you eliminate the funds and traditional IRAs offset taxable dollars the year you invest and permit the funds to grow tax-deferred.