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Don’t be One of Those Americans Who Aren’t Retirement-Ready

5 April 2016 in Investing Insights

April is Financial Literacy Month, and to mark this event, we will publish a blog series on topics related to financial literacy.

“The most expensive degree remains the one you don’t get,” the country’s Secretary of Education, John King, Jr. recently remarked. The pricey degree Mr. King was in fact referring to was financial literacy.

Thankfully, a lot of pupils around the country will be getting schooled this month on how to earn, manage and invest money. You may also be able to get immersed in some kind of financial literacy curriculum sponsored by your city or town this month. All these teachings are directed at helping us manage and invest our money wisely and stay out of money trouble. Welcome to Financial Literacy Month!

A lot of us could in fact use a lesson or two in making sound financial decisions and planning our financial future, if you believe the recent data on our personal finances.

Let’s put our lens on retirement for a moment. Many Americans who are about ready to enter their sunset years don’t have much of a nest egg, according to a report published last year by our own government. It found that about half of households age 55 and older do not have an IRA, 401k or other savings for retirement. Less than half of this population, however, do expect to draw on so-called defined benefit plans like pensions.

But even for those with some retirement savings, their nest egg may not take them all that far. The median retirement savings is about $104,000 for households aged 55 to 64 and $148,000 for those between 65 and 74. This is equivalent to a respective inflation-protected annuity of $310 and $649 per month. The study also viewed data from businesses and non-profits that also seemed to argue that the majority of Americans approaching retirement risk not having adequate financial resources to maintain their current standard of living.

Select financial resources for all households age 55 and older

A slim majority of Americans nearing retirement age will enter their sunset years without a retirement savings plan. “DB” denotes defined benefits plans such as pension plans. Source: U.S. GAO 1
A slim majority of Americans nearing retirement age will enter their sunset years without a retirement savings plan. “DB” denotes defined benefits plans such as pension plans. Source: U.S. GAO 1

Saving for retirement today and start compounding your returns

When should you start saving for retirement? Financial advisors say it is never too early to drop a chunk of your monthly paycheck into a retirement account – and ideally in your 20s when you start earning a steady paycheck. The compounding effect of money can be very powerful especially over a long period (see graph below).

Your nest egg can start to get quite big as you reinvest the returns from your initial investment that then generate their own returns. So, $5,000 invested at 10 percent annually for 30 years with you adding $250 monthly to this pot should grow to more than $580,000 – which puts you ahead of most Americans today in or close to retirement.

Plug some ballpark numbers into this simple compound interest calculator and see where you might end up if you put aside a few hundred dollars each month.

Benefits of saving and investing early

This graph makes a case for investing early to exploit the compounding effect of money Source: J.P. Morgan Asset Management, Guide to Retirement, 2016 Edition
This graph makes a case for investing early to exploit the compounding effect of money
Source: J.P. Morgan Asset Management, Guide to Retirement, 2016 Edition

Benefit from the potential tax breaks of saving for retirement

If you need more reasons to start saving for your golden years, consider the potential tax benefits of contributing to a retirement savings account. One vehicle is the traditional IRA which is a tax-deferred investment that delays the tax hit until you withdraw the funds in retirement. You may be able to deduct your IRA contribution from your taxable income depending on your income level and whether you or your spouse is covered by a retirement plan at work. Check out our recent blog post Taxes 101: It’s Not What You Make, It’s What You Keep).

Take advantage of our IRA promotion!

Open a no-fee Motif IRA and invest today for a brighter tomorrow! Through January 31, 2017, get $150 with an IRA transfer of $5,000 or more.

  1. U.S. Government Accountability Office, Retirement Security, Most Households Approaching Retirement Have Low Savings, May 2015.

To qualify for the $150 cash bonus, you must open a new Motif Investing IRA account and fund with an IRA-to-IRA transfer of at least $5,000. A transfer is defined as an IRA trustee to IRA trustee transfer (rollovers and contributions do not qualify). Funds must be transferred by January 31, 2017, and remain in your newly established IRA account for a minimum of 30 days to qualify for the bonus offer. Certain restrictions may apply, as listed below. The cash bonus will be credited to your account within 45 calendar days following the 30-day qualification period. Transfers from an existing Motif account do not apply. This offer is not valid with any other offers and is non-transferrable. Motif reserves the right to terminate this offer at any time. Offer expires January 31, 2017.

See your tax or legal advisor about the IRS guidelines on contribution limits and the appropriate tax treatment for this bonus, as Motif does not offer any tax, estate, or legal advice. The cash bonus will not be reported to the IRS as a contribution to your retirement account.

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