Financial Independence Albert Einstein was quoted as stating, compound interest
“is the greatest mathematical discovery of all time.” With
all his advanced findings in math and physics, the greatest, in his
opinion, applies to the growth of money. Here
is an example of the power of compound interest at work. Jeff set aside
$436 each month earning an average rate of return of 8%. He did this
from age 30 to age 65, at which point he accumulated $1 million. Sandy,
on the other hand, started saving at the age of 50. She knew that she
would also need $1 million, like Jeff, to reach her retirement goal.
Saving in the same investments, Sandy needed to set aside $2,890 each
month to reach her goal. In total, Sandy saved $520,200 of her own money
to accumulate $1 million. Jeff saved $183,120 to reach $1 million at
age 65. The
difference is Jeff let his money do the work. Einstein emphasized that
allowing the growth of interest to work over time was an extraordinary
and practical discovery. If
setting aside money for retirement is important to you, making your
money work for you can give you an enormous advantage. Consider time
your ally and consider taxes and inflation your opponents. Let’s
look at some practical ways to make your money work for you. Taxes
eat away at a retirement nest egg. Fortunately, the government gives
incentives to save for retirement by offering tax-advantaged retirement
plans. Tax benefits are extremely important when saving over long periods
of time because more of your money continues to work for you. Traditional
Individual Retirement Accounts (IRAs) and Roth IRAs are popular options.
Traditional IRAs may allow you to receive a tax deduction on your investment.
Roth IRAs allow you to withdraw tax-free income during retirement, assuming
certain conditions
are met. IRAs can be an excellent way to supplement your retirement
income without relying on Social Security benefits or employer-sponsored
plans. Be sure to check the eligibility requirements of IRAs, and remember,
you have until April 15 to contribute for 2003. Employer-sponsored
retirement plans, such as 401(k)s, 403(b)s, and 457s, are generally
funded by the employee with pre-tax dollars. Employers can offer a match
on the employees’ contribution, which is an extremely valuable
benefit when offered. Self-employed
persons or business owners have many opportunities with retirement plans.
In addition, to saving for retirement, a business owner can decrease
his or her tax bill, and create an excellent way to attract and keep
quality employees. Consult
your financial and tax advisors when considering which combination of
retirement plans are appropriate for you. Consistent review will help
you stay on track in addressing your retirement goals. The example of
Jeff and Sandy exemplifies the power of time. Whether you are just starting
your career or nearly approaching retirement, the lesson is not to delay
any longer. Use time as your asset and take advantage of appropriate tax beneficial retirement plans to help you achieve financial independence. And that is just one more Principle of Prosperity!
Anthony Saffer helps Christian families develop principled financial strategies
to address their financial goals and leave legacies. You may contact
Anthony at (619) 297-2003, ext. 119 or e-mail: asaffer@wradvisors.com
(Broker/Dealer Waddell & Reed, Inc. of Shawnee Mission, KS).
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