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The Three Things

Setting Up Your
Retirement Plan

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Setting Up Your Retirement Plan

The safest way to ensure you'll have a comfortable annual income in your retirement is to have the greatest amount of money saved -- the largest possible nest egg. All other sources of retirement income -- part time job, Social Security, return from other investments -- are subsidiary to the nest egg.

It's wise to overestimate your retirement needs. This reduces the risk of outliving your savings and helps you be prepared for emergencies. You want to retire with as much money as possible.

There are three ways to maximize your retirement savings:

1. Start saving early. If you have not yet started to save for retirement, do it now. It is crucial to start saving as early in life as you possibly can. Remember that most of the power you will get from investing comes from compounding (leaving the interest you earn in your account, which makes your investment larger so that it gains even more interest). But compounding benefits the early birds most. If you were to start saving $2,000 a year at age 25, with a 10% rate of return, your nest egg at 65 would come to $974,384. Only $80,000 of that would have come from your $2000-per-year contribution. The rest, a whopping $894,384, would come from return on your investment. The amount you would make on your total nest egg drops precipitously for every year you delay saving.
2. Save as much as possible. Most of us have some areas where we could save more. If you're currently spending everything you make, find areas where you can reduce spending. If you can't save dollars, save pennies. Get books and videos from the library rather than buying or renting them. Make your own coffee. Wash your own car. Buy generic vitamins. These are simple pieces of advice, but they work. Remember -- a dollar a day is three hundred sixty five dollars a year.
3. Invest as aggressively as you can. This doesn't mean you should take risks you're not comfortable with. But getting the highest possible return on your investment is critical to successful investing. A difference of only a few percentage points in return can have a huge impact on your savings plan. If you invest a lump sum at a 7% rate of return, your money will nearly double in ten years. At 10%, it will double in only seven years. If you want to maximize your nest egg, you have to maximize both the length of time during which you invest and the rate of return you make.

Psychologically it's easier to save if you have a goal in mind. Once you've decided on your retirement goal, subsidiary aims like saving more and maximizing return will fall into place.