Savings: For Retirement
When you hear the phrase “saving for retirement,” what you should hear is “investing for retirement.” That’s the attitude you’ve got to have if you want to actually, you know, retire. Sometimes people think they can save for retirement simply by putting money in the bank. Taking the phrase a bit too literally, they just shove their nest egg into a savings account and forget about it. Let’s take a look at what that will get them.
Let’s say Tom goes to the bank and puts $1000 in a savings account so he can retire in 40 years. The savings account earns, say, 1.25% interest annually and he never puts anything else in. In 40 years Tom will have: $1,643.62
But that example was a bit unreasonable. So let’s change it up a bit: this time, Tom’s putting in $1000 every year for 40 years. This time his retirement savings account comes out to: $52,133.18. Hmm…that’s better, certainly. But it’s not going to last him 10-30 years like it needs to.
This savings account thing just isn’t working out so well. Maybe it’s time for Tom to start thinking about his retirement in the frame of investing, rather than just saving. Let’s see how that changes things.
Tom’s gotten wiser. He knows a savings account won’t deliver what he needs, so he turns to a good mutual fund instead. A good mutual fund gives great diversity and is something of a fire-and-forget investment- you don’t need to monitor it constantly. It’s easy enough for anyone to do. So let’s say the mutual fund averages 8% return on investment over the 40 years. For the sake of example, let’s suppose Tom only invested $1000 once, like he did in the very first example. His retirement nest egg comes out to $21,724.52. It’s less than the constant investing with the savings account, but that 6.75% difference in interest rate gave him a $20,080.90 boost over the first example. Not bad. Not bad at all!
Now for the “best case” scenario amongst my four examples: Tom invests $1000 every year for 40 years and the mutual fund averages 8% again. He’ll need a bigger nest, because this retirement nest egg totals $279,781.04. That’s $227,647.86 more than the savings account earned under the same conditions!
I hope this helps you take a new look at retirement. Remember: if you’re reading this, you’re not too young to start planning to retire!
Thanks for reading,