Maybe you’re well on your way to planning for your retirement. If so, congratulations—the earlier you start, the better your chances to reaching your financial goals. But if you haven’t started yet, and you’re wondering why you need to save for the future when there are so many other perfectly good things to do with that money now, read on.
Here are five reasons why starting early to save for retirement makes sense:
- You may live quite a long time in retirement. Most people spend at least 15 to 20 years in retirement, so your life expectancy plays a key role in planning for how much money you’ll need and making sure your savings last.
- Your retirement lifestyle may be just as costly as your current lifestyle. Some people find that their expenses decrease in retirement—their house is paid off and children have moved away. Others find that their dreams for retirement come with big price tags. Depending on your retirement goals, you may need a minimum of 70 to 80 percent of your pre-retirement income.
- Social Security will not cover all your retirement expenses. According to the U.S. census bureau, today’s retiree getsless than half their income from Social Security. The rest will need to come from other sources, includingpersonal savings and pension plans.
- Inflation will erode the power of your savings. Inflation will take a bite out of your retirement savings. It may look like you’ll have enough income, but your money will buy a lot less in the future than it does today.
- Your employer-sponsored savings plan is one of the most powerful ways to save. Tax incentives make your employer-sponsored savings plan one of the smartest ways you can save. If you’re not taking full advantage of your plan, you’re missing out on a powerful savings opportunity.
Several key features make your plan one of the best ways to save for your future:·
- You’re in control of your savings potential. You can save automatically. You simply specify how much to save. The amount will be automatically deducted from your paycheck and deposited to your plan account—before you ever see the funds in your paycheck. Plus, your plan offers a variety of investment options managed by experienced professionals.
- Your contributions reduce your current taxes. Because your contributions are made with pre-tax money, you reduce your overall taxable income, which adds up to considerable savings.
- Put the power of compounding on your side and save even more. Through the power of tax-deferred compounding, your money can grow even faster because earnings that could have been taxed get reinvested and earn even more.
To see how it works, check out the hypothetical scenario1 below:
Mark, who is single, makes $20,000 a year and claims no dependents. He currently saves $1,000 after taxes through his bank. If he saves that same $1,000 on a before-tax basis through his plan instead, he can increase his net take-home pay:
|Taxable Bank Account||Pre-Tax Plan Account Savings|
Mark's Gross Earnings
Adjusted Gross Income
Federal Income Tax
Annual Net Take-Home Pay
Mark takes home an additional $150 annually by saving through his plan!
The benefits of pre-tax savings in the plan are so powerful that you may actually end up with more take-home pay. To see how much you may be able to save in this situation, consult your tax or financial advisor.
1 This illustration is hypothetical and for demonstration purposes only. It assumes a 10% federal tax bracket at retirement. This example does not represent any specific product nor does it reflect sales charges or other expenses that may be required for some investments.
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