Retirement Savings Strategies – Best Investment Options

You’ve heard it before, but it’s the golden rule of investing: the sooner you start putting money aside, the more the power of compound interest can work for you.

How does compound interest work? By keeping your money invested over a long period of time, you earn interest on the interest you earned before, as well as on the part you save. It takes awhile, but soon you’ll see that a large part of your earnings is actually coming from interest earned on your “winnings,” sort of like playing blackjack with the house’s money.

Here’s how it plays out: Suppose you put $2,000 a year in an individual retirement account earning 11 percent compounded annually (the long-term average for stocks) from ages 30 to 39, then let the money sit there until age 65 without any other contribution. You’ll have around $418,000. Now suppose you start at age 40 with those same $2,000-a-year contributions. You still put the same $20,000 in, but because you started 10 years later, it’ll only be worth around $161,000 by age 65.

So, which would you rather have, the $418,000 retirement or the $161,000 retirement? The choice is largely yours: you can let compound interest do the work for you, or you can scramble like mad later.

Your Job – The Best Investment

Raising your earnings is a great way to justify saving more. Salary raises stay with you year after year, so if you make an extra $500 this year, you’ll get that extra $500 every year you work in that job.

John Neuenschwander, vice president at Merrill Lynch in Fargo, North Dakota, points out the importance of earnings at an early age. “My dad had a saying about earning money that was simple but true, ‘If you work for it when you’re young, it’ll work for you when you’re old.’ ”

Use Payroll Deductions

For the same reasons you withhold money to cover your taxes, you should use payroll deductions to fund your retirement. If the money never comes home, you won’t miss it much. Once the money hits your checking account, too many bills compete for your pay.

If your company doesn’t offer a deduction plan for retirement savings, ask for one. About one in four workers in America don’t have a retirement savings plan at work, and the biggest reason employers say they haven’t provided one is because their employees haven’t demanded it.

A Penny Earned is not a Penny Saved

Even if you make a decent wage, chances are that you have debt. If you_re like most people, the best financial move you can make is to cut up the cards and begin paying down credit-card debt. As you get a grip on your spending, you’ll have more and more money to save for retirement and other goals.

Pay off high-interest debt and pay yourself instead. If you carry a $6,000 credit card balance at 18 percent for a year, you’ll pay more than $1,000 in interest. Instead, invest that $1,000 in a stock fund that returns 10 percent and you’ll have $1,100 by the end of the year. That’s $1,100 more than you would have had if you carried all that credit-card debt. Do that over 20 years and you’ve made a massive down payment towards your happy retirement.

Neuenschwander agrees with this advice. “When a client tells me they have $10,000 in the bank and $5,000 in credit card debt, I tell them to pay the credit cards off first. Sometimes they’ll say, ‘But I might need the money.’ Fine, if you need the money later, charge it on your card or take out a loan. In the meantime, you’re guaranteeing an 18 percent return on investment when you pay off your credit card debt, and there’s no way I’m going to guarantee that with another investment.”

Live well, but within your means. Sometimes it seems like everyone else is doing better than you are, but you can bet if someone is making the same amount of money as you and they can afford things you can’t, they’re either deep in debt or they’re getting help from outside income sources.

Be Patient

Finally, remember that good investors need patience. By constantly jumping at every turn in the market or every hot trend, you may end up damaging your ability to amass the kind of wealth you’ll need to retire.