The time is 7:30 a.m. as I arrive in Newark, New Jersey. I make my way through the classroom am greeted by an array of vibrant new faces, quietly chatting among themselves. As the clock strikes eight, I step to the front of the class, clear my throat and introduce myself, “Good morning, everyone! Welcome back to day two of your orientation—my name is Lily Lau and I’m here today to speak to you about your retirement plan.”
As a Retirement Counselor, I educate employees and inspire them to help make sound financial decisions. Most of these employees have 20, 30 or even 40+ years remaining of their working careers, and the message I deliver is a simple yet effective one—time is on your side and, when used wisely, it can truly be your biggest asset. Look, we all work very hard for our money and it’s important to put your money to work for you. When you set up your retirement plan, not only can you receive tax benefits, but you can also earn compound interest.* With compound interest over a work span of 20, 30 or even 40+ years, the growth on your investment can be significant—even if you start small.
*Compound interest is the addition of interest to the principal sum of a deposit, otherwise known as interest on interest. It is the result of interest being reinvested, rather than paying it out, so that interest in the next period is earned on the principal sum plus previously accumulated interest. This means that your balance doesn’t just grow, it grows at an accelerated rate.
Saving for retirement is like a journey of a thousand miles; it all begins with a single step—getting started.
When it comes to saving, it’s important to put yourself first. The key is to get started and, with time, gradually contribute more. You may be asking, “How much should I be saving?” Consider starting with what you can, with a long-term goal of at least 15% of your annual salary. What you may not know is that most retirement plans have built-in tools like Contribution Accelerator that, if activated, can help you save more. Contribution Accelerator is an auto-escalation tool that gradually raises your contribution rate by 1% each year. Contributions will continue to increase until your established contribution goal is eventually reached. If your contributions ever feel overwhelming, you may adjust this feature. This simple tool can help take the guesswork out of saving, and be the key differentiator between a sizable account and a substantial one. Be sure to check with your retirement provider to see if this feature is available on your account.
For illustration purposes; does not reflect an actual investment. This assumes a rate of return of 6.5% annually and does not consider the impact of fees or expenses.
In the image above, the bottom line graph illustrates what a consistent 3% contribution rate can do by age 65, if you make $50,000 annually and start contributing at age 25. With Contribution Accelerator activated, however, the initial contribution rate of 3% would automatically increase by 1% each year on your enrollment anniversary, until 15% is reached; see results on the top line graph. The difference in savings could be significant: over $731,000 over the next 40 years.
You may be asking, “What does a 3% contribution rate feel like if I earn $50,000 annually?” Well, you love your food—we all do! You decide, however, that instead of buying breakfast and lunch every day, you’d rather brown bag it twice a week, so you can save 3% towards your retirement account and watch it grow. Or maybe you like to order out. Doing something as simple as skipping out on a pizza delivery or Chinese takeout is just one example of how a short-term sacrifice today can provide you with a number of long-term options tomorrow.
As a Millennial and a Retirement Counselor, I understand the fine balance between satisfying the needs of today, and also those of tomorrow. Like you, I am faced with short-term expenses such as housing costs, food, and maintaining a social life. Saving for the future can feel like a daunting task, but it doesn’t have to be! With anything we start, there’s an initial adjustment period. Before we know it, however, it becomes a part of our routine. This concept also applies to saving. The small price we pay today can help us gain financial security tomorrow. I take great pride in helping my clients understand this balance and encourage them to make better-informed financial decisions. So, take a few minutes and consider setting up your retirement plan today. Be sure to invest regularly, take advantage of Contribution Accelerator, and let the power of time and compound interest do the heavy lifting!
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