Some people like to work; they love their work, their work gives them satisfaction and fulfillment, brings a challenge to their life and gives them the energy to get through life. Some are actors, some are financial advisors, some are teachers or writers.
For the rest of us, we are working towards retirement. The ability to relax and enjoy the savings we have accumulated over years of employment, the ability to bask in the sun and enjoy life. To make your retirement a reality and make it a comfortable one, you need to plan, and it’s better to plan and save early than to try to accumulate funds later. The benefits of early retirement planning allow you to accumulate those funds necessary for your financial security during your retirement years.
Now some cold hard facts
The first concerns inflation. In 1980 a Big Mac cost a dollar, now it costs almost two. It’s what economists (really) call the “cheeseburger measure” – the cost of a fast-food cheeseburger will remain more or less constant in terms of inflation-adjusted income, due to market pressures that keep the cost of food more or less stable.
This means that a dollar in the future will have less purchasing power than a dollar today, so you will need more of it to plan for your retirement. In general, the real inflation rate in the United States hovers around 3-4% per year, which means that the purchasing power of the dollar halves approximately every 18-25 years. Keep this in mind when planning for your retirement: if you live comfortably on $30,000 a year now and plan to retire in 25 years, you will need a general retirement income of around $60,000. $ per year to maintain your current level. (the actual value you’ll need will likely be lower, as the house and car will be paid off…on the other hand, your standard of living will likely have increased before that as well.)
Paying for retirement means putting money aside; the best way to do this is to put it in a 401(k) program that matches the company. Here’s how it works – up to a certain percentage of your salary, for every dollar invested, your employer will match it; in addition to this, the contribution and matching funds are tax-deferred – they do not count towards your current income for income tax purposes. This actually means you get about 130% interest on the money by the time it hits your 401(k) account.
But, as the saying goes on late night TV, “that’s not all…”. Any interest earned by your investments is also tax-deferred, meaning your nest egg grows faster. In fact, this avoids a penalty of 33% on the interest income from your investments. The sooner you start contributing to your 401(k), the sooner the miracle of compound interest will start working in your favor. (A rule of thumb – 72 divided by the interest rate in percentage points gives the number of years before compound interest doubles your original investment. This is why the employer matching portion of a 401(k) program is so important – it gives you a head start on building your retirement portfolio.