Many years ago, I was given a “Pocket Pig” from Newton Federal Bank and still have it along with other Covington and Newton memorabilia. It held 16 quarters and “If this Pocket Pig could talk he would say, save a little every day.” Sixty years later, that’s still great advice – Pay yourself first!
One of the advantages current pre-retirees have is the availability of multiple retirement plan options. With choices of IRA, 401-K, Roth, SEP and Simple IRA plans, you shouldn’t have much trouble finding a vehicle to utilize. Individual Retirement Accounts (IRA’s) were first available in 1974, so we “old-timers” missed a few years. Another great advantage pre-retirees have is time – Use it wisely.
Albert Einstein would have done quite well in Mrs. Burke’s algebra and trigonometry classes. He stated that “Compound interest is the 8th Wonder of the World”, and he was right. As an example, a 40 year old with a $100,000 retirement account will see it grow to $400,000 at age 64 with a consistent 6% growth for 24 years.
As mentioned in my last article, that type of steady return won’t happen, but it’s a basic example of the “Rule of 72”. To determine how many years it will take your money to double, simply divide your rate of return into 72. An 8% rate of return will take 9 years while a 4% return will take 18 years.
To me, it’s a good idea to defer your taxes as long as possible as I don’t anticipate retiree tax brackets being significantly lower than they are currently. Tax deferral will apply to assets held in qualified plans as well as the values in annuities and life insurance. Simply stated, choosing when you pay taxes allows your money to grow faster. A notable exception is the Roth IRA which is funded with after-tax dollars. Again, that would be another attractive vehicle to consider.
Looking at the 8% return mentioned previously, an account taxable at 28%, will take 12 years to double instead of nine. You would need 25 years instead of 18 for your account to double twice. Your decision of tax-deferred over taxable should be fairly easy. The only two vehicles that cannot go into IRA plans are raw land and life insurance, so you have the proverbial truckload of options.
If your retirement funds have not accumulated to the amount you would like, now is the time to consider an increase of the money you set aside. Placing $250 monthly in your retirement plan with a return of 6% will grow to $169,075 in 25 years. When you add that to the funds you have already set aside, that’s significantly more than the average citizen. The majority of Americans have less than $50,000 in their retirement accounts. You don’t want to be a part of that group. In spite of the claims of some politicians, the government cannot provide “cradle to grave” support. For proof, check on the stability of many European countries.
A final consideration is how long, exclusive of Social Security, will your retirement funds last? For example, an account of $250,000 with a 4% rate of return and a $2,500 withdrawal will be exhausted in ten years and one month. There are financial instruments that can guarantee retirement income as long as you live and that can greatly alleviate concerns about running out of money.
Take a look at your current situation and plan a course of action. Remember…All you have is what you send on ahead.
Mike Lassiter is a Chartered Life Underwriter and Chartered Financial Consultant. He is a Licensed Insurance Counselor and a Registered Investment Advisor. He can be reached locally at 770-786-2781.