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Planning for retirement when you’re young

By Barbara Whelehan ·
Friday, March 26, 2010
Posted: 5 pm ET

I was in my early 30s when I got scared into saving for retirement. At the time I was a stay-at-home mom, attending a meeting of women in the communications field. Two financial advisers spoke on the topic of retirement security. If you don't start saving for your retirement, they said, you'll almost certainly be impoverished when you get older.

That was all the inspiration I needed. When I landed my next full-time job, I immediately inquired about its retirement plan. But once I was given my investment options, I wasn't sure what to do. If only I had a guide. ...

You have a guide -- Bankrate's 2010 Retirement Guide. Check it out. If you're just getting started, read the stories in Chapter 1 about conquering your workplace retirement plan. Start with 3 ways to build a secure retirement plan. Because retirement contributions are taken out of your paycheck, you'll never miss the money. And the younger you are when you get started, the better off you'll be.

Example: If you're 25 and you invest $5,000 per year for 10 years and then stop, for a total outlay of $50,000, you'll have amassed $728,867 at age 65, assuming annualized gains of 8 percent. But if you wait until age 35 to get started and invest $5,000 per year for your entire career for a total outlay of $150,000, you'll have $566,416 at age 65, assuming the same return.

Why the discrepancy in savings? It's the magic of compounding. (Inflation is not taken into account in these calculations.)

Bankrate's 2010 Retirement Guide offers stories for everyone. If you want to learn about two distinct investing styles, read Buy and hold vs. active management. What to know about target-date funds is another story to peruse if you think a one-fund solution is best. Maybe it is, maybe it isn't. Just don't make any assumptions.

If you're thinking about cashing out of your 401(k), that could be perilous. But if you're already experiencing hardship, read the rules for penalty-free withdrawals.

Getting close to retirement? It's time to start thinking about where you can find retirement income. If your employer offers a cash balance pension plan and is giving you a choice between taking the lump sum or getting an annuity, read "Making the pension decision." It's probably the most important retirement decision you'll ever have to make.

And don't forget -- this is 2010, the year you can convert your traditional IRA to a Roth regardless of your income. Should you or shouldn't you? IRA expert Ed Slott says it's really a good idea, like betting on a horse after the race, because you can easily undo the conversion if your account value drops. Roth conversion investment strategies offers an explanation of how to segregate your assets to take full advantage of a Roth conversion.

In short, Bankrate's 2010 Retirement Guide has something for everyone. Best of all, it's free! Check it out.

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1 Comment
Susan R
April 14, 2010 at 11:25 pm

Excellent article. Every young working person should know about the magic of compounding. It is a real eye opener to see how easy and painless it is to watch your money grow.