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Setting Up Your Retirement Plan
The safest way to ensure you'll have a comfortable annual income in your
retirement is to have the greatest amount of money saved -- the largest possible
nest egg. All other sources of retirement income -- part time job, Social Security,
return from other investments -- are subsidiary to the nest egg.
It's wise to overestimate your retirement needs. This reduces the risk of
outliving your savings and helps you be prepared for emergencies.
You want to retire with as much money as possible.
There are three ways to maximize your retirement savings:
- Start saving early. If you have not yet started to save for retirement,
do it now. It is crucial to start saving as early in life as you possibly can. Remember that most of the power you will get from investing comes from compounding (leaving the interest you earn in your account, which makes your investment larger so that it gains even more interest). But compounding benefits the early birds most. If
you were to start saving $2,000 a year at age 25, with a 10% rate of return, your
nest egg at 65 would come to $974,384. Only $80,000 of that would have come
from your $2000-per-year contribution. The rest, a whopping $894,384, would
come from return on your investment. The amount you would make on your total nest
egg drops precipitously for every year you delay saving.
- Save as much as possible. Most of us have some areas where we could save more. If you're currently spending everything you make, find areas where you can reduce spending. If you can't save dollars, save pennies. Get books and videos from the library rather than buying or renting them. Make your own coffee. Wash your own car. Buy generic vitamins. These are simple pieces of advice, but they work. Remember -- a dollar a day is three hundred sixty five dollars a year.
- Invest as aggressively as you can. This doesn't mean you should take
risks you're not comfortable with. But getting the highest possible return on your
investment is critical to successful investing. A difference of only a few percentage points
in return can have a huge impact on your savings plan. If you invest a lump sum at
a 7% rate of return, your money will nearly double in ten years. At 10%,
it will double in only seven years. If you want to maximize your nest egg, you have to maximize both the length of time during which you invest and the rate of return you make.
Psychologically it's easier to save if you have a goal in mind. Once you've decided on your retirement goal, subsidiary aims like saving more and maximizing return will fall into place.
The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.
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