Money Matters – Step 5: Maximize Retirement Investing

The best time to plant a tree is 20 years ago. The 2nd best time is RIGHT NOW.

Retirement isn’t about age, it’s about the ability to make ends meet financially so you don’t have to toil at a regular job until the day you die.

If you’ve been paying attention up to this point, your views regarding money and investments have changed. No longer are you looking backwards, wondering “Where did it all go?“, now you’re looking forward and rationalizing “Where can I make my money work FOR ME?“

Time to start making systematic investments over time that will provide for your future retirement.

Invest 15% of your gross income into your retirement fund. There are so many different “retirement funds”, it’s tough to pick one that will pay off over the long term. Dave recommends a mix of mutual funds that will pay a steady 12%, specifically spreading them equally over 4 different funds:

• 25% into “Growth and Income” funds (sometimes called “Large Cap” or “Blue Chip” funds)
• 25% into Growth Funds (sometimes called “Mid Cap” or “Equity” funds. An “S&P Index” fund would also qualify)
• 25% into International funds (sometimes called “Foreign” or “Overseas” funds)
• 25% into “Aggressive Growth” funds (sometimes called “Small Cap” or “Emerging Market” funds)

This mix of funds works the best overall payoff for your retirement future.

So how much is enough? How much of a nest-egg do you need set aside so that you can retire? When you can live off of 8% of your nest-egg per year, you will have enough money set aside as well as a nice inheritance for your loved ones.

This is where all those years of “higher math” that I took in high school should be able to help make the calculations, but I’ve long since forgotten all that stuff. Luckily we have the internet to the rescue!

What Is Compound Interest?

Compound interest (or compounding interest) is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods. Thought to have originated in 17th century Italy, compound interest can be thought of as “interest on interest,” and will make a sum grow at a faster rate than simple interest, which is calculated only on the principal amount.

Consider a mutual fund investment opened with an initial $5,000 and an annual addition of $2,400. With an average of 12% annual return of 30 years, the future value of the fund is $798,500. The compound interest is the difference between the cash contributed to investment and the actual future value of the investment. In this case, by contributing $77,000, or a cumulative contribution of just $200 per month, over 30 years, compound interest is $721,500 of the future balance. Of course, earnings from compound interest are taxable, unless the money is in a tax-sheltered account; it’s ordinarily taxed at the standard rate associated with the taxpayer’s tax bracket.

Here’s a simple calculator that will demonstrate it’s nearly magical power: Compound-Interest-Calculator

Time to plant some trees, starting NOW.

Next up: Step 6: College Funding

Advertisement