| Just contributing to your retirement savings is not | | | | ended up more with the late contribution option - but |
| enough. You've got to make them earn decent | | | | of course you contributed 3 times as much. |
| returns so their compounding effects significantly add | | | | 6.3% compound rate accumulations: |
| to what you eventually accumulate. To settle for | | | | After 40 years at a 6.3% compound rate, both |
| pathetic investment earnings makes saving for | | | | contribution options accumulate to $88K. This |
| retirement only a contribution game with meager | | | | compound rate was chosen to produce this result. |
| results. This article shows the kind of earnings you | | | | Clearly, as earning rate increases so do your |
| need to compound your way to a decent retirement. | | | | accumulations. But now those early contributions earn |
| Government-regulated retirement programs, like your | | | | far more: 9 times more than the $10K early |
| 401(k), 403(b) or IRA are geared to help you save | | | | contribution, and only 3 times more than the $30K |
| for retirement. Though their annual contributions are | | | | late contribution. |
| limited, they're deductible from you working income. | | | | 8% compound rate accumulations: |
| This helps you contribute more to your savings than | | | | After 40 years at an 8% compound rate, the $10K |
| using after-tax dollars. Their tax-deferred growth | | | | early contributions accumulated to $157K while the |
| allows all your earnings to contribute to the | | | | $30K late option accumulated only to $122K. Again, |
| compound rate of your savings without any loss | | | | increased earnings accumulate more. But now your |
| annually to income taxes. | | | | investment earnings are contributing a greater share |
| I've constructed an example to show how important | | | | to your accumulations. |
| it is to get decent earnings on your investments to | | | | The magic of compounding is making those early |
| accumulate significantly more and to make your | | | | contributions win out over larger later contributions. |
| earlier contributions pay off. | | | | Comparing final accumulations, the $10K early option |
| Let's consider that you have 40 years over which | | | | achieved almost 16 times contributions versus a little |
| you can contribute and grow your money. But there | | | | more than 4 times contributions for the $30K late |
| are two different contribution options by which you | | | | option. |
| can choose to contribute. The first option is that you | | | | Higher earnings not only produce higher accumulation |
| contribute just $1,000 (i.e. $1K) to your savings every | | | | amounts but a huge difference for when the |
| year for the first 10 years. But then you don't | | | | contributions are made. |
| contribute any more for the remaining 40 years; you | | | | Learn to make your savings work hard: |
| just let your 10 years of contributions grow by its | | | | Recognize first that getting higher earnings rates |
| investment earnings. Your total contribution under this | | | | significantly enhances your final accumulation no |
| scenario is $10K. Let's call this option the '$10K early'. | | | | matter when you contribute over a long time. But, |
| The second option is that you forego any | | | | second, they make those early contributions work |
| contribution for the first 10 years, but then contribute | | | | hard at earning much more than later contributions. |
| $1K per year every year for the last 30 years. Of | | | | Many people waste their savings in low earning |
| course these contributions will grow also by their | | | | savings vehicles. They play it too safe or pay too |
| investment earnings, too. Your total contribution in | | | | many fees - or both. Though they worked hard to |
| this second option is $30K - three times as much as | | | | contribute to their savings, they dropped the ball on |
| in the first option. Let's call this option the '$30K late'. | | | | making those contributions do their share of earning. |
| Now, let's compare the resulting accumulations after | | | | You should be able to get your investment earnings |
| 40 years for both these options for different | | | | over 6% at least - and ideally up to 8% - and more. |
| compounding rates. The compound rate is that | | | | These growth earnings are below the average for |
| amount of investment earnings annually left in your | | | | stocks over 80 years (1926-2006) as shown by |
| savings to grow- not lost to taxes or fees. A 4% | | | | Ibbotson Associates. |
| earnings rate that lost 25% of the earnings to taxes | | | | So I emphasize that there are 2 parts to achieving |
| would compound at 3%. A 4% tax-deferred earnings | | | | independence:o Contributionso Investment earnings |
| rate has a 4% compound rate. | | | | - one is not enough |
| 4% compound rate accumulations: | | | | Contribute to your savings - starting as early as |
| After 40 years at a 4% compound rate, the '$10K | | | | possible - so you can also get the benefit brought by |
| early' accumulates to $40K (4 times what was | | | | decent earnings. Then work at getting earnings of |
| contributed), while the '$30K late' accumulates to | | | | 8% or more. Make your savings work as hard as you |
| $58K (about 2 times what was contributed). So you | | | | do. |