Have fun and retire young is the mantra of many high school
and college students today. Unfortunately, only a minority
of them will be able live their dream life.
Social Security and pensions probably won't be around when
your teenager reaches retirement age. In the last ten years
we've experienced a large reduction in pension plans
offered to employees. Employers are replacing pension
plans with contributory retirement programs. Unfortunately,
according to a report of the National Association of State
Boards of Education, "most workers with access to these
contributory programs are not participating sufficiently to
allow them to retire in their sixties without suffering a
great decrease in their standard of living."
This may mean that everyone under age 30 will need to
self-fund their own retirement. In order to be financially
prepared, it is important they start investing young and
avoid financial pitfalls that plague many of their peers.
This requires they learn the basic financial education
skills so they are financially prepared.
To be financially prepared for retirements today's youth
will need to have over a million dollars to be fully
financially prepared for a self-funded retirement. After
calculating the long-term inflation rate, a young adult
today will need over a million dollars in order to retire
on an annual income of around $35,000 (today's dollars,
adjusted for inflation and salary increases). This is
assuming they live to be 90 years old. However, with the
improvements in medicine, many experts feel we will live
beyond that mark, so just planning to live to 90 may not be
enough. And $35,000 annual income per year is not a lot of
money to enjoy the golden years.
What's the answer? One answer may be a simple investment
of $100 per month starting at age 18. If that investment
earns a return similar to the S&P 500 average over the past
82 years, they would have over a million dollars many years
before they reach retirement age.
Have fun and retire young by following these simple steps.
1) Invest Young -There are powerful financial forces on
your side when you start investing young. One of the most
beneficial to young investors is compounding interest.
Compounding interest occurs when you invest money and earn
a return on what you invest. The amount your investment
returns then starts to earn you money. This forms a
snowball affect that will make your money grow bigger the
longer you are invested.
To break it down, you're making money off the interest your
investment already paid you. Then you continue to make
money off the interest that you made each year. That
means year after year your investments can grow at a faster
and faster pace.
2) Consistent, young, investment plan. Investing on a
consistent basis may allow you to generate long-term gains
over time. For most, simplicity equals consistency; and
consistency over time leads to financial security. Start
to follow a simple, consistent, investment plan now; then
as your investment knowledge grows you can add other forms
of potential higher-return investments.
3) Use investment vehicles that offer tax benefits -Roth
IRA may allow you to withdraw money at retirement tax-free.
Many people don't realize about 40% of your income goes to
pay taxes. So by choosing an investment vehicle like an
IRA may help to keep more money in your pocket.
4) Diversify your portfolio - Initially, the stock market
can be a great place to start investing young. As your
account size grows you could take some of that money and
move it into real estate or business ventures.
Diversification is important because is lowers risk. For
example, if you have 'all' your money invested in the stock
market when prices are declining then 'all' your money may
decline in value as well. Now if you diversify your
holdings and had a portion of your money invested in the
stock market, some in the real estate market and some in
businesses you might avoid a big loss.
The thought of funding one's own retirement makes some
people nervous but if people start young and stay
consistent, today's generation will be able to afford the
lifestyle they want now and through out their life.
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To find out more practical money tips go to
http://www.FreeBy30.com and watch the free video lessons.
Vince Shorb, the leading young adult financial literacy
expert, provides real world advice on how to be financially
free in his latest course 'Financially Free by 30'.
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