"Time is money," - Benjamin Franklin.
Benjamin Franklin may not have been referring to the effect of time on money accumulating in an employer-sponsored retirement plan, but his words certainly ring true to today's investor. That's because time is one of the best allies an investor has. But even if you didn't start investing in your plan until later in life, there's another old saying that you may want to heed - "Better late than never."
No matter where you are in your life or how much you have in your retirement account, your employer-sponsored retirement plan may have features that will help you build your nest egg.
First, it offers the advantage of compounding, which is the ability of your earnings to grow on each other -- tax free until withdrawal. Second, many plans offer matching contributions, essentially "free" money, which are made on your behalf by your employer. Third, your plan offers you a range of funds from which to choose.
The earlier you put these elements to work in your plan, the better off you'll be in the long run. Say, for example, you're 25 years old and just started working. Even if you don't make much money and have little income to spare, a small contribution could grow into hundreds of thousands of dollars - even a million - by the time you retire. A contribution of just 2% from a $25,000 annual salary is just about $10 out of your paycheck every week. If you increase your contribution by just 2% each year until you reach the maximum the company allows, for example 10%, and earn a 10% return on your investments, you would have $1,437,543 by age 65.*
Now we all know life happens and not all of us start building nest eggs at such a young age. But what about when you turn 40 and suddenly realize you have saved little or nothing for retirement? Don't panic. You can still make up for lost time, but you may need to put your plan into high gear.
First, start contributing as much as possible to your plan. Starting at 5% and increasing it 2% each year until you reach the company maximum might be a place to begin. Then it may help to invest in more aggressive funds, such as stock funds, which are subject to short-term volatility but have historically generated higher long-term returns than all other asset classes. The accompanying chart shows you how much you could accumulate in 25 years.
Whether you're fresh out of college, approaching retirement, or somewhere in between, there's no time like the present to take advantage of your employer-sponsored retirement plan.
*This hypothetical example is for illustrative purposes only and assumes that the maximum contribution to the plan is 10%.
Use Annuities to Plan for Your Future - Article