While retirement planning (such as 401k) involves much more than finances – things like: 1) when will you retire, 2) where will you live, 3) what will you do. These factors depend largely on the income you can expect during your retirement years.
In general, younger people are able to take on more risk: they have more years to recover if they incur any losses. Older people, on the other hand, tend to be more conservative in their investments. This can be a bit of a Catch-22: since older investors tend to limit risk, the investments frequently have lower earnings potential. Starting early is one of the best ways to ensure you will have enough money to live comfortably during retirement. It’s never too late to start saving for retirement, and every little bit helps.
The investments you choose for retirement planning may change over time in response to your goals, risk tolerance and investment horizon. Asset allocation – or how you apportion the various investments in your portfolio – is viewed by many as more important than the actual securities chosen for the portfolio. The three main asset classes include stocks (equities), bonds (fixed income), and cash and cash equivalents, and each has different levels of risk and return. Finding the balance that is most appropriate for your situation takes time and effort.
Because of the power of compounding*, the earlier you start saving for retirement – through stocks, employer-sponsored plans, mutual funds or other investments – the longer your money can work for you, and the more money you might be able to save for the future.
Anyone can lose track of their spending and go bankrupt, or fail to save enough for their golden years. Having a sound retirement plan, clear financial goals , and a trustworthy financial adviser can keep you from this danger
Let me give the following example to illustrate the point: Joe invests $5,000 in Apple. After first year, the share price rises 20%; his investment is now worth: $6,000 ($5000 x 0.2 = $1,000). Let’s say he holds that stock for another year. In year 2, shares appreciate again another 20%. Now Joe’s investment of $6,000 grew to $7,200 ($6000 x 0.2 = $1,200). Because the 20% appreciation was calculated against $6,000 in the second year. That’s an additional $200 compounded after 2 years.
Fact, $5,000 invested at 20% annually for 25 years would grow to $476,981.
*Compounding is the ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings. In other words, compounding refers to generating earnings from previous earnings.