Save for Retirement or Retire Debt?

Many of us are faced with this question, especially recent graduates who join the work force with significant student loan balances. According to the Federal Reserve Bank of NY, the average student loan balance exceeds $24,000 and the pressure to reduce debt can be felt every time a loan statement is received. At the same time, we recognize the need to plan for retirement; however, the immediate pressure to reduce debt often outweighs the pressure to plan for something that can be years, even decades away.

Reducing debt, especially debt with relatively high interest rates, is an important financial goal. What retirement planners also need to recognize is the enormous value of compound interest and how it impacts on retirement savings.

For example John and Mary are 25 years old have similar financial situations. Mary begins to save immediately for retirement by investing $100 from each month’s paycheck. At a rate of 8%, Mary’s retirement account balance will be over $18,000 in ten years and over $324,000 when she turns 65.

John decides to wait before he begins to save for retirement. He has debt to pay off, things to buy, vacations to take – he wants a better life style now and retirement is still many years away. At 35, he begins tucking away the same $100 each month that Mary has been saving for ten years. Assuming the same 8% rate, his retirement balance at age 65 will be only about $142,000. In fact, because of compounding, Mary could stop making any monthly contributions at age 35 and her investment would still continue to grow to nearly $166,000 – almost the same as John’s – by the time she reached 65.

At age 65, Mary has contributed only $12,000 more from her pay than John did; but interest compounding has helped Mary’s retirement account grow to $183,000 more than John’s. The differences are even more dramatic, if monthly contributions increase. $200 per month, for example, at 6% will yield $285,000 in 30 years but $652,000 over 40 years.

We all have different comfort levels regarding debt, investments, and financial goals. While financial planners suggest annual contributions of 10% of salary, most of us fail to consistently meet this target. Peter Macaluso, co-founder and president of FMi, stresses, “It is critical to begin retirement saving early to take advantage of interest compounding. You can start with a small contribution and increase it as your financial condition improves; but the sooner you begin, the more time your money has to grow.”

Your FMi Sales Representative can explain not only what the various retirement plans offer to you and your employees, but also the retirement plan administrative services FMi offers to
your company.

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