Does your retirement seem years and years away? Even so, while it may, you owe it to yourself to look ahead and begin giving thought to a time that may stretch over 20 or more years. Granted, time may be on your side. However, saving for retirement is not as simple as it may initially appear. The fact is, many factors ultimately determine the type of retirement you will have.
Inflation. You’re probably aware that inflation can erode your savings over time. But, do you take inflation seriously? Did you know that at 3 percent inflation, $100 today would only be worth $34.44 in thirty-five years? Therefore, look for retirement savings avenues with the best chance of outpacing the long-term effects of inflation.
Taxation. One constant to consider is the impact of taxes. Your present income level, tax bracket, and the types of tax-advantaged retirement vehicles available to you can all play an integral part in how well your retirement savings plan develops. It can be important to utilize pre-tax contributions to employer-sponsored plans (e.g., a 401(k) plan) or an IRA (Individual Retirement Arrangement) to take advantage of the tax-deferral benefits of these plans.
Diversification. For many individuals, deciding how to invest pension and profit-sharing plan assets can be challenging. Most people know it is imprudent to invest everything in a single security, even a blue chip stock. It’s important to spread your risk over a variety of investment options such as mutual funds, stocks, or bonds to create an investment mix that is consistent with your overall objectives. This holds true for investments within your retirement plan, as well as those outside it.
Discipline. One key ingredient to the success of a retirement plan is a disciplined approach to saving. By making regular contributions to your employer-sponsored plan or IRA, you can increase the power of compounding interest (accruing additional interest on interest already earned). For instance, the automatic contribution from your paycheck to your 401(k) plan affords you the discipline of enforced savings. In addition, your employer may match at least a part of your contribution, resulting in another gain for you. With a steady flow of contributions, your retirement assets have a greater chance of reaching your long-term goals.
Personal Savings. Not everyone has access to an employer-sponsored retirement plan. Therefore, personal savings become all the more important. On the other hand, some individuals may be limited by the amount they can contribute to such plans and, because of the impact of inflation, taxation, and overall investment performance, retirement plan assets may be insufficient to sustain future income levels. You may need to supplement traditional retirement plan income with personal savings and investments to meet your long-term retirement income goals. So, as you can see, it is important to save and invest to prepare for potential shortfalls.
The earlier you recognize the variables that shape your retirement planning, the greater the likelihood you will develop the right strategy to achieve your long-term objectives. However, simply understanding these principles does not guarantee future success. If you take an active role with continual re-evaluation of your retirement planning, you will enhance your chances of success.