What Motivates You?
The truth is there is ample motivation to make the most of investments regardless of how much funds you have to start with.
Investing towards Retirement – Reality Check
It used to be that Americans could count on a pension plus Social Security to get them through their Golden Years. But traditional pensions only account for an estimated 18% of the total aggregate income of today’s retirees, and Social Security accounts for only about 38%.1 Alas, the responsibility for the bulk of your nest egg now rests with you.
As you begin thinking about a comfortable retirement, consider that by most estimates you’ll need at least 60% to 80% of your final working year’s income to maintain your lifestyle after retiring. And don’t forget that your annual income will need to increase each year — even during retirement — in order to keep up with inflation. At an average annual inflation rate of more than 3%, your cost of living would double every 24 years.
You’ll also have to consider the likelihood of increased medical costs and health insurance premiums as you grow older. The average cost of a year’s stay in a semi-private room in a nursing home, for instance, is now over $80,000 a year and could rise more than $130,000 per year by 2030, assuming an annual inflation rate of 3%.2
Getting a Leg Up
If this dose of reality makes you glum, cheer up — you have some allies. Investment vehicles, such as your employer-sponsored retirement plan and individual retirement accounts (IRAs), allow you to put off paying taxes on your earnings until you begin taking withdrawals, typically during retirement when you may be in a lower tax bracket.
Additionally, time can be an ally — or an enemy. Delaying the process of investing can significantly reduce your results. Consider this example: Jane begins investing $100 a month in her employer-sponsored retirement plan when she’s 25. Mark begins investing the same amount when he’s 35. Assuming an 8% annual rate of return compounded monthly, when Mark retires at 65, he’ll have $150,030. Jane will have $351,428.3
While this is only a hypothetical scenario and there are no guarantees any investment will provide the same results, you can see the remarkable difference starting early may make. But no matter what your age, contributing the maximum amount to your employer-sponsored retirement plan and IRA each year could help you achieve the comfortable retirement that each of us desires.
1Source: Social Security Administration, Fast Facts & Figures About Social Security, 2012.
2Source: MetLife, Market Survey of Long-Term Care Costs, 2012.
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