Planning For Retirement – Things To Consider
Planning for retirement can be a daunting task. There are so many different vehicles to save for retirement, and it can become very overwhelming. There are some simple principles you should keep in mind when planning for retirement. In this article we will examine these principles and take a look at some of the most common options.
The first thing to understand when planning for retirement is that the earlier the easier. If you start saving for retirement when you are twenty five, then you will have to save much less each month than someone who starts at forty five. For example if you invests $300 per month from age 25 to 65 with an average annual rate of return of 8%: at the end you will have $1,054,284.46. Now compare that to someone who starts at age 45 and invests $300 per month for twenty years with the same return. Their total will be $177,884.18. The first person only contributes $72,000 more, but ends up with over 5 times the total amount. This is the power of starting early in your retirement plan, and don’t forget it’s never too late to start.
The next important principle to consider when it comes to planning for retirement is to be consistent. A good rule of thumb is to save 10% of your income towards retirement. The best way to do this is to set it up as an automatic draft from your checking account, or use a retirement option that takes the money before you even have a chance to spend it. This will help you reach your goals and as you invest the same amount of money each month it will help to level out the average rate of return you receive on your money.
There are two primary types of retirement accounts. The first type of account is one where you invest pre-tax dollars. The money is taken out of your check before any taxes or anything else. Then when you withdraw the money in retirement you will pay taxes on the amounts you withdraw. A 401K is the most popular type of these plans, and is often very beneficial because many companies agree to match a portion of the contributions you make. This is free money and will really add up over time.
The second type of retirement account is one where you invest after tax dollars. The most popular type of these accounts is a Roth IRA. These work opposite of 401Ks in that the money that you contribute you have already paid taxes on, and then this money grows tax free and you can spend it in retirement tax free. This can be really beneficial if you have a long time to invest for retirement.
As you can see there are several things to think about when planning for retirement. The best thing you can do is to just start immediately if you haven't already. If you have a 401K program at work, start putting money in as soon as possible. If not, visit your local banker or investment advisor and start contributing to a Roth IRA.