Savings 101
Saving and investing for retirement should be one of your top priorities. Some people don't think it is important now and will put it off until later, but that's a bad idea. It's actually more important to save now, rather than later. For example, consider the two scenarios below:
For those who don't believe me, take a look at the table at the end of this post. It shows the amount of money for each scenario from age 25 to 55.
Every year since I started working full-time, I've been contributing the maximum (allowed by law) into my 401k and Roth IRA account. If you're not, then you should examine your finances closely to see where you can cut back.
- Saving $11000 from age 25 to 34 and $0 from age 35 to 55. Annual return of 9%/year
- Saving $14000 from age 35 to 55. Annual return of 11%/year
For those who don't believe me, take a look at the table at the end of this post. It shows the amount of money for each scenario from age 25 to 55.
Every year since I started working full-time, I've been contributing the maximum (allowed by law) into my 401k and Roth IRA account. If you're not, then you should examine your finances closely to see where you can cut back.
Age Scenario 1 Scenario 2
25 11000 0
26 22990 0
27 36059 0
28 50304 0
29 65832 0
30 82757 0
31 101205 0
32 121313 0
33 143231 0
34 167122 0
35 182163 14000
36 198558 29540
37 216428 46789
38 235907 65936
39 257138 87189
40 280281 110780
41 305506 136966
42 333002 166032
43 362972 198296
44 395639 234108
45 431247 273860
46 470059 317985
47 512364 366963
48 558477 421329
49 608740 481675
50 663526 548659
51 723244 623012
52 788336 705543
53 859286 797153
54 936622 898840
55 1020918 1011712
posted by Ray at 1:09 AM
6 Comments:
yup, demonstrates the principles of compounding interest. unfortunately, it's hard for many young people to save money. some people also get discouraged if they can't achieve great returns early on. where do you put your investments? also, do you think $1M will be enough to retire on?
$1M was just a theoretical number. I actually save more than $11000 per year, so I should have more than that.
The brokerage I use for my IRA account is www.sharebuilder.com. Sharebuilder, based on the concept of dollar-cost-averaging, allows you to invest a fixed amount each week/month for $12. With this strategy, your buy price will be averaged out over time, therefore you'll never catch the lows or high.
Most of the securities I invest in are ETFs (Exchange Traded Funds), which are a collection of stocks that mimic a particular stock index. Some of the ones that I own include:DVY,FEX,FXI,ICF,IXC,IXN,SPY, QQQQ. I try to be diversified geographically and across industries.
Saving and investing for retirement is important but I wouldn't consider it a top priority. For people our age at the moment, I would say that there are "other" top priorities. When people retire, there will be help from government programs like Medicare and Social Security, so no need to worry. Now, there is also Part D for Medicare, thanks to Bush, so that will help with prescription expenses. Also, some people may plan to work for a long, long time in a job they really enjoy (you can bet it won't be pharmacy for me), so retirement may not be that big an issue. And if you're really starving or homeless as an old bum, hopefully, your loving offsprings will have a heart to help you out. Lastly, the biggest variable that we're not seeing in your math is what if someone doesn't live long enough to savor retirement??? Ok, with all that said, it is important to save and invest, better later than never :) -Cecil
I take a different strategy for my Roth IRA and dump the max in my account in January to take advantage of the full year's worth of earning potential. And I just put my money in boring mutual funds with very low expenses that generally track markets. In the long run, it's the same as dollar cost averaging, but over years, vs. months. But I need to figure out what to do next year since I took a new job that has a very generous deferred profit-sharing plan without requiring any contributions, but no longer gives me the option to invest more of my own money in a 401(k). I'll end up with a lot from the company if I stick around long enough to get fully vested. In the meantime, I'm trying to figure out what kind of account to set up for my own money.
I think everyone should be educated and practice savings 101. If people can't do at least 10% of their salary in 401k, then they should rethink about how they spend their money. I have friends who don’t do 401k and I have to explain to them why it’s important. It’s not like they can’t afford to put aside 10%. I think a lot of people prioritize their living lifestyle more important then savings. People want materialist things and they the excitement and pleasure from materialistic things. My friends tell me they can’t afford to save, so I ask them to dematerialize themselves and buy only the necessity. At the end of the month, look at your bank account. Coffee is not a necessity!!! Usually, people are surprise how much they can save and how much they enjoy seeing their bank account grow. Set a goal for yourself to save for you and for your next generation. -joanne
I'm suprised that a lot people don't have a good concept of finance 101. I think everyone should set short and long-term financial goals. Like paying the mortgage in 15 years instead of 30. It's important to save for retirement and college tuition when you have kids like the 529 plan. I have one set up for Valerie when I got her SS #, and set a side some money for her and Roth IRA every month. My company has very generous profit-sharing plan. But in the long run, I like invest my money towards buying another property.~Sherry
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