A retirement plan is a major stronghold in your personal finance planning. At the least, you create a safety reserve for a time in your life when you’re likely to have a reduced capacity to work. At the most, you can reward yourself for a lifetime of employment.
If you’re new to retirement savings, the idea of putting money away in an account for thirty or forty years can be difficult to stomach. You have pressing needs now, and you want to be able to enjoy the money that you worked hard for.
But starting now will give you valuable time — time that allows your retirement savings to grow. When you take distributions from retirement, it will be at a point in your life when that money is likely to have even more meaning for you.
There are very good reasons why retirement should be a high priority item on your list. Here are a few:
• Continued financial independence.
When you put money away, you’re caring for a much older person — yourself, in the future — who may be more vulnerable than you are now. Your out-of-pocket medical expenses may increase in retirement, and you may not be able to work at the same pace that you did when you were younger. That sense of security that comes from being financially independent in your old age will have a positive effect on your outlook for your retirement years.
• Protection against risk. To make the most of the funds in your retirement account, you want to invest in assets that bring you a good return. The assets that are known to have the potential for the highest returns are the stocks, also known as equities-shares, that represent partial ownership of a company.
Stocks, unfortunately, do not give you the same steady return, month after month, that you get with a savings account. With stocks come the potential for losses as well as gains. Over the short term, as we’ve seen in the past few years, the stock market can be subject to jaw-dropping volatility. The markets may rise to dizzying heights in one year, and plummet the next. Individual stocks can rise and fall, and one sector may be harder hit than another by particular changes in the economy. Investing in equities over a short amount of time can be very risky, because of this volatility.
One way to protect yourself against this risk and potentially gain a higher return from equities is to give yourself a long timeline. Over twenty or thirty years, those highs and lows can potentially average out to reflect the underlying growth – – steady, incremental growth over decades — of the many companies that you have invested in. To give your retirement account that longer timeline, start saving now.
• Compound interest. We’ve talked about compound interest before in these columns, and it boils down to this: time is money. The more time you have, the more time you give your savings’ earnings, and your earnings’ earnings, to grow. Starting to save for retirement in your twenties and thirties can give you an enormous advantage in pursuing a comfortable retirement.
Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 19 years experience in retail banking and with financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at email@example.com.