Suppose
you set aside $1,000 a year (about $19 a week) from age 25 to
34 in a retirement account earning 8% a year, and never invest
a penny more. By the time you turn 65, your $10,000 investment
will have grown to $168,627.
But
if you don’t start saving until you’re 35 years old and then invest
$1,000 a year for the next 30 years—that’s a total investment
of $30,000—you’ll have only $125,228 by age 65.
You
might want to read this example over again, slowly.
The
moral of this story (a depressing one if you’re in your forties)
and the focus of this chapter: If you don’t start saving in a
tax-favored retirement account while you’re young, you’ll
miss out on perhaps the best investment opportunity of your life.
That’s because retirement plans offer terrific tax advantages
that allow your savings to grow rapidly. In order to maximize
the benefit, though, you should get started right away. The government
limits the amount you can set aside each year, so if you fail
to contribute now, you won’t be able to make it up when you’re
older (and perhaps wiser).
But
there’s more at stake here than losing out on a juicy tax shelter:
you could actually end up living out your golden years in poverty.
The Social Security Administration currently predicts that by
the year 2014 it will be paying out more than it is taking in,
and unless Congress finds the money for a complete overhaul by
about 2034, there won’t be enough money in the fund to pay out
full benefits. While Social Security will almost certainly be
around in some form when we retire, we can’t rely on Social Security
alone to support us adequately in our later years.
A
less-publicized but equally pressing problem is the quiet revolution
that has been taking place in the private pension
world. In our parents’ era, employees stayed with the same company
for 20 or 30 years, and many were rewarded at the end of their
work lives with pensions that were paid for by their employers.
Old-fashioned pensions, known as defined benefit plans, are rapidly
becoming the spotted owls of the employee benefits world as fewer
and fewer companies are offering them to new employees. By the
time most of us retire, traditional pensions may well be nearing
extinction. New types of pension plans have only partially filled
the gap left by the old-fashioned kind.
And
because high-tech medical advancements promise to keep us alive
anywhere from ten to twenty years longer than our grandparents,
we need to stash away even more cash for our old age. Most Americans
who reach the traditional retirement age of 65 today can expect
to live beyond the age of 80. By the time our generation retires,
the figure could well be closer to 90.
Before
I go any further, I have a confession to make. Although I was
eligible to start contributing to my company’s retirement savings
plan when I was 24, I waited until I was 26—simply because I didn’t
get around to it. And I paid dearly. I currently have $52,000
in my 401(k)
retirement plan, but would have more than $112,000 if I had started
saving when I was supposed to.
This
chapter will teach you everything you need to know about retirement
accounts but have been too busy to ask. You’ll be happy to learn
that you don’t have to be rich or financially savvy to put some
money into an individual retirement account (IRA)
or a company plan. And unless you have a massive trust fund or
are expecting a giant inheritance from a wealthy old relative,
you’d be wise to start doing exactly that—right now.
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