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Saving for a Decades Away Retirement

David Ning

A common wish among older folks is that they started their retirement planning at a much younger age. But who could blame them for their lack of commitment to saving in their 20s? It's very difficult to understand the implications of actions made today decades down the road. Learn from the wisdom of your elders. Remember these points about saving for retirement that you ought to know:

Recognize that your nest egg will grow to become plenty big in time. It's easiest to build wealth if you start saving at least a little bit when you are young. Putting money into retirement accounts in the early years of your career allows you to get the maximum benefit of yearly compounded tax savings. If you don't contribute to a 401(k) or IRA, that tax-saving opportunity is lost forever. Later in your career you'll wish you contributed the maximum amount to your tax-advantaged accounts.

Your salary will increase. You may become depressed whenever you see those charts showing the average salary in our country being stagnant over the last decade, but that says nothing about a worker learning new skills and moving up the ranks. While higher pay is never guaranteed, raises over time are common for a good portion of the population that continues to reinvent themselves, work hard and take advantage of opportunities when they arise. Take this into account.

Trying to predict your tax situation is next to impossible decades out. There's no way to know how much our retirement withdrawals will be taxed in the future. A better strategy would be to focus more of your time trying to grab all the tax deductions you are legally allowed now so you can put more money away. You can also add tax diversification to your portfolio by saving in both traditional and Roth retirement accounts.

Don't become too complacent when you see a huge projected net worth number by retirement. It's common to relax and spend a little the first time you make a big retirement net worth projection because the ending number always seems so big. But most people realize soon enough that inflation and taxes will make a big dent in that number. You may believe that a few million in the bank could provide you with a life of luxury forever, but it might just afford a modest lifestyle based on careful spending in the future. Keep saving.

Return projections are guesses. Change the returns up or down a percentage or two and you could literally double or halve the final retirement number given enough time to compound. Times could be better than expected and you could underestimate the returns your portfolio will get, but overestimating your portfolio's value is just as likely. You can't control the returns you're dealt, so don't be caught being unrealistically optimistic.

There is something you can control: Your savings rate. How much you save is the biggest determinate of how much you'll end up with. Compound interest is amazing, but you need to build a foundation for the cash to grow first. You could buy something once now or be able to afford five in the future. It's your choice.

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