This post was contributed by a community member. The views expressed here are the author's own.

Health & Fitness

Your Retirement Contributions – Small or Large – Add Up

Your retirement contributions – small or large – add up

Many people have retirement accounts such as IRAs and 401(k) plans, but not everyone takes full advantage of them by making the maximum annual contributions. If you are one of the few who does, good for you. If not, and if you’d like to contribute the maximum, but don’t feel you can manage to set aside that much, consider this approach:

Increase your contributions a step at a time. In time, you’ll be making the maximum contribution and making better use of your retirement accounts.

 

Find out what's happening in Dixonwith free, real-time updates from Patch.

Every step makes a difference

You might think you should wait until you can manage a substantial increase in your contribution amount before you actually make the change. However, any additional amount you can contribute, no matter how modest, has the potential to make a significant difference in your retirement account’s accumulation potential.

Find out what's happening in Dixonwith free, real-time updates from Patch.

Suppose for example, that you presently contribute $1,000 per year to an IRA that earns a hypothetical 7 percent average annual return, and that your current IRA balance is $25,000. If you continue contributing $1,000 annually, your account will grow to $134,278, before taxes, in 20 years. Now suppose you increase your contribution by just $200 each year (which is less than $17 per month), contributing $1,200 this year, $1,400 next year, and so on through the next 20 years, by which time you would be contributing $5,000 annually. At the end of 20 years, your account balance would be $207,238, before taxes. (Please note this is a hypothetical illustration only. These figures do not represent any actual investment’s performance or yield. Figures are before taxes and transaction costs, and assume reinvestment of all earnings.)

 

Other benefits

Most retirement accounts offer tax advantages, so the more you contribute, the more you may benefit from the favorable tax treatment of your retirement vehicles. Also, increasing contributions may help you make up for lost time if you started saving for retirement relatively late, or if you seek to help rebuild account balances that may have been diminished during market struggles. (Please remember that amounts withdrawn from an IRA or 401(k) generally are taxable in the year of withdrawal and may be subject to a 10 percent penalty if withdrawn prior to age 59 1⁄2.) Design your stepping strategy -

Whether your retirement is around the corner or decades away, the more you contribute toward it now, the more you may help enhance your potential for a financially comfortable future. For information or assistance in making retirement contributions or other aspects of planning for retirement, contact your Waddell & Reed financial advisor. 

Investors should consider the investment objectives, risks, charges and expenses of a fund carefully before investing.  For a prospectus containing this and other information for the mutual funds offered by Waddell & Reed, call your financial advisor or visit us online at www.waddell.com.  Please read the prospectus carefully before investing. 

Please note that mutual funds will fluctuate in value and an investor can lose money by investing in mutual funds.

We’ve removed the ability to reply as we work to make improvements. Learn more here

The views expressed in this post are the author's own. Want to post on Patch?

More from Dixon