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Saving for retirement is very important. The first thing is to open an account and the second is to keep putting money in it over a long period of time.
IT’S LIKE PLANTING A SEED
Opening an account is like planting a seed and continuously funding the account is like watering the seed. Time will cause the seed to grow and sprout branches (diversifying your investments). Over a long period of time you will have a fully-grown tree and be able to live off of the fruit (dividends and interest) that the tree produces, all without having to cut off any branches and cutting back the investment/tree.
I produced a short slide-show video that illustrates how saving for retirement works: http:MoneyPlanSOS.com/Tree-tirement (It is also at the bottom of this post).
PRE-TAX RETIREMENT CONTRIBUTIONS
401k plans and Traditional IRAs offer you the benefit of saving money pre-tax. The dollars you contribute to the account are not taxed.
For example: Joe earns $120,000 and will pay $24,000 in taxes if he is in a 20% tax bracket and take home $96,000.
However: Joe decides to save 10% into a pre-tax account ($12,000). He will only pay $21,600 in taxes and bring home $86,400.
PRE-TAX SAVINGS NET RESULTS
By saving 10% of his earnings in a pre-tax retirement account Joe will bring home $86,400 and have saved $12,000 – a $2,400 advantage over not saving and bringing home $96,000 after taxes!
OTHER RETIREMENT SAVING OPTIONS
What if your company offers a match? What if they don’t? What if the 401k investment options aren’t all that great? Are there other options besides a company 401k?
The advantages and disadvantages of 401k when compared with other retirement saving options:
Advantages of saving money in a ROTH IRA using after-tax dollars:
If you save $100 a month for 40 years and earned 12% you will have put $48,000 into an account but have an investment portfolio in excess of $1.176 MILLION dollars! Question: Would you rather pay taxes on your 401k/Traditional IRA growth or pay taxes on the original investment and be able to bring home the $1.176M tax free?
I love the idea of tax free money. When there is no match I choose to pay taxes on the seed, not the tree.
[…] In addition, now is the time to start saving for your retirement. Steve has done an excellent video on the importance of saving early for retirement titled “tree-tirement”. But where do we save for retirement? The two most common ways are through 401(K)’s and IRA’s […]