When determining the mix of your financial investment portfolio, pay special attention to your retirement assets. Unlike most other investments, these assets can grow in three potential, and significant, ways: compound interest, tax savings, and employer match (if your employer is sponsoring the plan). These are designed to replace defined benefit pensions in most companies. The premise behind these accounts is that once your money is deposited, you cannot deduct it until you reach retirement age. Any money you deposit or that your employer deposits on your behalf is not taxed until that time. This allows you to build a nest egg, temptation-free and tax-free.
Whether your plan is employee-sponsored (a 401(k)-type plan) or your own retirement account (one of several types of Individual Retirement Accounts), it will generally be based on stocks, bonds, mutual funds, or CDs. And, thanks to compound interest (which we discussed in Chapter 11, "Committing to a Savings Plan"), if you get an early start, you can significantly build up the assets in your account. Consider these eye-opening calculations:
- $2,000 a year invested starting at age 25 in a tax-deferred account earning 10% average return will become $885,000 at age 65.
- The cost of waiting? Start at 35 with the same investment criteria, and the nest egg would total only $329,000.
That's right, the $20,000 NOT invested in those 10 years cost $556,000.
In addition to compound interest, there are also significant tax savings involved with retirement funds. Because the money is not taxed when you make the deposit, you conceivably have more money to invest. Finally, if your employer offers a retirement plan with matching funds, take it! These matching funds are free money allowing your assets to grow even faster.
Whether or not your retirement plan is employer-sponsored, your savings, plus compound interest where applicable, and tax savings provide compelling reasons to make investing in a retirement account lucrative no matter what your age or Life Values Profile.