The value of saving for retirement

Welcome to Investor Blitz! This blog is dedicated to all things financial. My goal is to educate those who are less educated when it comes to personal finance and economics. Let’s get started with my first post.

Retirement savings. Sounds boring, right? Well, it is for most. Why save money now, for 20, 30, or 40 years from now, when you can enjoy that money today? Maybe buy a new car, go out to dinner, tour Rome, or whatever else your little heart desires. The answer is simple: Because if you don’t, you will most likely work for someone else the rest of your life.

Saving for retirement should not be something that you consider doing. It should be something that you DO! Why? Because future 60 year old you, will thank present day you. If you don’t save, or don’t save enough, you will be working well into your 60’s or 70’s or worse, you could end up working the rest of your life; till the day you die.

Most employers (good employers), will have some form of retirement plan that is part of your benefits package. Usually, this is a 401K. All a 401K is, is a group of mutual funds that you select from, and whatever you select is where your contributions go. For instance: let’s say you select the hypothetical mutual fund ABC. Mutual fund ABC is currently selling for $20 per share in the market. And, let’s say your contributions for your current pay check are $100. If you have all of your money going to mutual fund ABC, that means this paycheck alone will buy you 5 shares of mutual fund ABC. Simple math: $100 buying power divided by $20 per share equals 5 shares.

Now, let’s assume, hypothetically, that mutual fund ABC shoots up in value 2 weeks later to $25 per share. This means, for you as the mutual fund owner, that you just made $25 in 2 short weeks. Again, simple math: you bought 5 shares of mutual fund ABC at $20 per share, and now those same shares are worth $25 per share, yielding you a $5 profit. $5 times 5 shares equals $25. This may sound poultry, but over time, and via more contributions, this $25 profit could be much higher.

How much higher could it be, you might ask… I’ll tell you…

We will pretend that you started investing in a 401K at the age of 25. We will also assume that you want to retire at the age of 60. So, you started off with $5,000, and you continued to contribute just $5,000 every year for the next 35 years. If you averaged a measly 5%, that, compounded over 35 years, would give you about $491,000 at the age of 60. Let’s compare these same numbers, but with you not starting a 401K until the age of 35. Now, by the time you reach 60, you would only have about $261,000. Not investing for 10 years, in this scenario, cost you about $230,000. And, 5% is pretty low. The average return is around 7% or 8% depending on what article you read.

In addition to your contributions to a 401K, most employers will match you a certain amount; usually between 1% and 7%. So, your 5% contribution could be matched another 5%, for a total contribution of 10% of your salary. In addition to the matching (which is basically free money your employer is giving to you), there are tax benefits as well. You are allowed to contribute to a 401K with either pre-tax money, or after-tax money. If you choose pre-tax, that will lower your taxable income when Uncle Sam comes knocking in April looking for his cut of your money.

The benefits of good retirement planning are too much for this tiny article. I simply wanted to get your feet wet with the absolute basics. I will be blogging a lot about retirement, so please subscribe and stay up to date on my future topics.

I appreciate you taking the time to read this post, and your comments and feedback are appreciated.

Categories: Retirement

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