I'm not going to try and persuade you that our economy isn't shaky. But I actually think you're missing out if you aren't consistently saving for retirement right now. I will make an appeal to the long-term investor inside each of you and lay out these five reasons why there's no better time than today to start investing for your retirement.
1. Free retirement education and resources. There's never been a time in history when investing information is so readily available, for free. You can go online right now and find out everything you ever wanted to know about proper asset allocation and diversification. You can also learn about about a particular investment class, company, and industry you're considering investing in. Check out a site like Brightscope.com, which will tell you how your company's 401(k) is performing compared to your peers. Armed with this knowledge, we can make smart choices about our retirement savings strategy.
[See 3 Retirement Worst Case Scenarios to Avoid.]
2. Tax incentives. There are several tax-advantaged ways to save for retirement. A traditional 401(k) allows you to contribute up to $16,500 annually and defer paying tax on those dollars until you take the money out in retirement. Or you could use a Roth IRA or Roth 401(k) and pay taxes on your contributions up front in order to get tax free withdrawals in retirement. I see that as a guaranteed return on my money, even if I'm only invested in cash within those accounts.
3. Unlimited choice. Individuals can invest in a variety of investment options. There are a wide range of safe, convenient, and inexpensive fund choices. Individual investors have the freedom to choose the funds they're most knowledgeable about and to select the allocation that provides risk they're comfortable with.
4. Reduced costs. Retirement investing has never been cheaper. Not only do we now have low-cost investment products such as index funds, but we also have low-cost online stock brokers to help us trade without high expenses eating away at our returns.
[See 5 Ways to Simplify Retirement Accounts.]
5. Compound interest. It's important to start saving today because of the power of compounding interest. When you invest, you are periodically paid interest on the money you save. This interest you earn is added to the principal of your investment. The next time interest is calculated, this larger principal amount is used. The longer you have your money invested, the more powerful compounding interest is. For example, $5,000 invested by a 20-year-old with an average 8 percent annual return will yield $160,000 by the time he retires. That same amount invested by a 39-year-old will yield only $40,000 upon retirement. Time can have a huge affect on your potential earnings. That's why it's important to get started today.
If you just started investing for retirement, tell us what convinced you to start in the comments below.
Phil Taylor is the author of the popular 52 Ways to Make Extra Money. Find out how to save more money and get the latest news on the best online savings accounts and the best online stock brokers at his blog, PT Money: Personal Finance.
Reader Comments Read all comments (2)
Phil Taylor of TX 4:05PM July 01, 2010
Spencer Moses of NY 2:27PM July 01, 2010