The Power of Compound Interest
The single most important factor in retirement planning is compound interest. This is the interest you earn not only on your initial investment, but also on the accumulated interest. Starting to save early, even with small amounts, allows your money more time to grow exponentially. The longer you wait, the more you will need to save to catch up.
Types of Retirement Accounts
There are several tax-advantaged accounts designed specifically for retirement savings. Common examples include:
- 401(k): An employer-sponsored plan where you contribute a portion of your pre-tax salary. Many employers offer a matching contribution, which is essentially free money.
- Individual Retirement Account (IRA): A personal retirement account that you can open on your own. Traditional IRAs offer tax-deductible contributions, while Roth IRAs offer tax-free withdrawals in retirement.
How Much Do You Need to Retire?
A common rule of thumb is the 4% rule, which suggests you can safely withdraw 4% of your retirement savings in your first year of retirement, and then adjust for inflation each subsequent year. To estimate your retirement needs, you can aim to have saved at least 25 times your expected annual expenses in retirement.
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