Broccoli. We eat it out of duty, not desire. Retirement plans are the broccoli of personal finance. You want to spend your money now. But you also know there will come a time when you will need retirement income. Unfortunately, then it is too late to begin saving for retirement. In fact, five years before that time is too late. Ten years before you retire might give you enough time to be able to put enough money aside, but you will need to live at a much-reduced standard (before and after retirement).
Let me take this broccoli metaphor one step farther. People generally begin healthy eating only after unhealthy eating has damaged them. Likewise, people often do little about retirement until they realize they cannot afford to retire.
There is good news, however. You can easily save enough for retirement, if you start early. In fact, the earlier you start, the less you have to save.
Let’s say you put $75 a month into a savings account earning 5 percent annually. After five years, you have deposited $4,500, but the account balance is $5,100. You got $600 free money from five years of interest — eight months of additional savings that didn’t come out of your pocket. Your money “earned” that money; you did not have to. Over the long term, this is powerful.
A Tale of Two Brothers
Let’s imagine twin brothers, Jim and Rob. Jim is a man of fleeting interests. Milk has a longer shelf life than his resolve. At age 25, Jim starts putting money into a retirement account. He saves $2,000 annually at 6.5 percent interest. Ten years later, he decides saving for the future is bogus. He never contributes another dime.
Then there is Rob. Once he finally makes up his mind, he follows through with lemming-like persistence. Rob could not decide to begin saving until he was 35. Then, just when his brother stops saving, Rob begins saving $2,000 annually at 6.5 percent interest. Rob — unlike fickle Jim — continues saving $2,000 each year until he is 65.
Time marches on. Jim and Rob are now both 65 years old. Jim has saved $20,000 ($2,000 a year for 10 years) and Rob has saved $60,000 ($2,000 a year for 30 years). But here’s where life can seem unjust: At age 65, Jim has a balance of $178,515, but Rob has only $172,750. Rob saved $40,000 more than Jim, but Rob end ups with almost $6,000 less.
Is this fair or just? No. Is the math correct? I am afraid so. Here’s the key point: Money saved early is worth much more than money saved late. The moral of Jim and Rob’s story? Besides proving that the world is unjust (Rob is a nice guy; he deserves better), it shows how difficult it is to put aside enough money for retirement. But if you begin early, it is possible for your money to earn enough money for you to retire on…
To read the rest of Reed’s feature on Retirement Plans for Artists, including the differences between traditional IRA, Roth IRA and SIMPLE plan, download the February/March issue, all about making, spending and saving money for your art business, in the Professional Artist Store.
DISCLAIMER: This article offers general tax and financial advice. If you need advice specific to your particular situation, consult a professional (which, by the way, is a tax deductible expense).