IRA And 401k Investment Decisions You Must Make

Adults are faced with many tough decisions. Your career, education and picking a partner (or none at all) are common examples. While you may consult with experts, family, and friends, some decisions you must make for yourself. The consequences of those decisions may impact the rest of YOUR life.

“I’ll worry about retirement later” is a decision, and a bad one.

Whether your current income provides a fine lifestyle, or you are living from paycheck to paycheck, the lack of savings is likely to cause big problems down the road.

He referenced a study of two investors. One opened an IRA at age 19, contributing $2,000 annually for only seven years. The second investor began at age 26, contributing $2,000 annually until age 65. The assumed (unrealistic today) rate of return for both investors was 10% (7% interest plus growth).The Daily Pfennig recently quoted the late, well-renowned Richard Russell.

Investor #1 made a profit of $930,641, a 66-fold return on his $14,000 investment.

Investor #2 made a profit of $894,703, a 11-fold return on his $80,000 investment.

Mr. Russell makes a dramatic point about compounding:

Compounding is the royal road to riches. Compounding is the safe road, the sure road, and fortunately, anybody can do it. …Of course, you need time …to allow the power of compounding to work for you. Remember, compounding only works through time.

But there are two catches in the compounding process. The first is obvious – compounding may involve sacrifice (you can’t spend it and still save it). (Emphasis mine) Second, compounding is boring – b-o-r-i-n-g …until the money starts to pour in. Then, believe me, compounding becomes …downright fascinating!

Both investors accumulated almost $1 million through discipline and prudent investing. Had the first investor stuck with his annual contribution for the entire 47 years he would have $1,743,880.

Today’s challenges

Young people are taking longer to reach adulthood. Many are in their late 20’s before finishing college and are saddled with student loan debt.

Major pension plans are being forced to revise their projections, even a 7% return is considered unrealistic today. Things can change; maybe the fed will raise interest rates back to 2007 levels. Don’t count on it!

Let’s look at some realistic possibilities in today’s world. The Securities and Exchange Commission (SEC) provides a handy compound interest calculator.