THE LOW-FAT GUIDE TO RETIRING EARLY
It’s an age-old problem based on the fundamental science of behavior: we humans do not know how to look into the future and imagine ourselves, our needs and dreams. But the truth is, the best we can do for our long-term future is to take some time to visualize it. Right now.
Countries around the world are facing a shortage of government pension plans; very few citizens can count on a comfortable old age from their governments, so saving even a small amount of money now can make a big difference in the future.
Whether you’re contributing to a workplace retirement plan like a 401k or an Individual Retirement Account (IRA), getting started early can make a huge difference to your retirement fund size. You can live a long time after you stop working.
The Power of Compound Growth
Investing even a small amount of money regularly can add up, thanks to the power of compound growth. In short, compound interest means that your income will generate your it’s own income.
Let’s take an example:
Investor 1: Imagine that investor 1 started depositing $250 into his retirement account every month when he was 22 years old. If he stays in this state for 40 years, he will deposit $120,000. Not too shabby, but not enough to retire comfortably. But add in the 7% annual growth rate—the average inflation-adjusted return of the S&P 500—and suddenly, Investor 1 now has $640,000. Thank you, compound growth.
Investor 2: Investor 2 waited 20 years to start investing, but tried to catch up by contributing twice, 500 USD/month. Even with compound interest, Investor 2 will only reach $263,000 in 20 years, which is just over half of Investor 1’s income. This is the power of compound growth. This is why so many people encourage you to start saving for retirement now, because it does make such a huge difference.
How To Save For Retirement
If you work for a company that offers a 401k plan or retirement plan, your employer could automatically enroll you when you started working. In this case, not only will your money work for you, but also defer taxes on that money.
Most experts recommend that you make at least a sufficient contribution to your retirement plan to be eligible to receive the appropriate contributions from your employer. Otherwise, you are literally giving up free money. If you’re freelancing or self-employed, you can save money in one of several entrepreneur retirement plans. including SEP-IRA and 401k solo. And just about anyone can open an IRA, even if you also save a 401k.
What Retirement Plans to Pursue
Any retirement plan may offer a long list of investment options, from US stocks to international bonds, and everything in between. Choose a fund that matches your expected retirement date, and your fund manager will adjust your investment portfolio over time and gradually shift to more conservative investments.
The closer you are to retirement, the more you want to consider diversifying your portfolio, thereby reducing the emphasis on volatile investments. As your retirement age gets closer, you will be more and more grateful for this transition.