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Saving for Retirement

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Those saving for retirement today have unique challenges compared with past generations. Many companies previously offered pension plans that rewarded a lifetime of work with guaranteed income for their retirement years. There was also Social Security Income(SSI) - a guaranteed lifetime benefit paid by the federal government. Many retirees received both a pension and Social Security.

The world is a different place today. Pensions for most private sector employees have been all but phased out and SSI could be forced to reduce benefits over the coming decades since there will be fewer workers relative to retired people. For those still working, and especially those just starting their working lives, you need to start actively planning for your retirement.

The best way to protect your future is to start a disciplined retirement savings plan as soon as possible. If you are relatively young, you don't necessarily need a lot of money now to secure your retirement, you have something just as valuable - time.

The Power of Compounding

When you plan to grow wealth over a lifetime, one of the most important concepts to understand is compound interest. Compound interest arises when interest is added to the principal, so from that moment on, the interest that has been added becomes the principal and also earns interest.

Here's an example - say you start saving $200 per month at age 22, and save until you are 65. If you earn the historical average stock market return of 8.5%, after 43 years you would not only have the $103,200 you saved, but you would have an additional $946,377.17. That's a total of over $1,050,000, all for $200 per month.

This example assumes a rate of return that's based on past averages (nobody can tell the future) and they also assume tax-free growth in an IRA, 401(k) or similar account. But it does serve to illustrate an important point - by starting early, you can dramatically increase your returns and your quality of life at retirement.

Looking Ahead

One important question to ask yourself is how exactly you want to live during retirement. And you should plan on doing a lot of living - the average American now lives almost twenty years longer than when Social Security was first developed. Do you want the freedom to travel the world to visit friends and family or would you rather depend on a part-time job to make ends meet? Start thinking about and planning for your future today.