For Your Future... For Their Future
No matter what your age, it is never too late (or too early) to begin planning for the future. The longer plans are put off for retirement, the more money it will take to fulfill those plans.
With Americans in general living longer, planning for one's retirement becomes even more crucial. In addition to longer life expectancies, Americans must deal with inflation. In general, prices for goods and services upon retirement will likely be higher due to inflation, which in turn could affect retirees and their families.
For Most, Social Security is Not Enough
Another point that must be emphasized is that, for most individuals, Social Security and employer-sponsored retirement benefits may not provide the level of financial independence and comfort desired in retirement. Social Security has not been, and never should be thought of as, the lone source of retirement income. Americans need to take their financial future into their own hands. By saving and investing while they are working, Americans can achieve the level of comfort desired in retirement. To encourage this type of saving and investing, the United States government created the Individual Retirement Account (IRA).
Self Directed IRAs and the Power of Compounding Interest
Albert Einstein called it "the most powerful force on earth" and, more than 200 years ago, Benjamin Franklin defined the concept of compounding interest as "the stone that turns all your lead into gold."
How does it work? The power of compounding interest comes from the fact that the original investment, as well as the income derived from that investment, is re-invested.
Compounding interest can be especially dramatic when the effect of taxes is removed from the equation. Do you know how much money you would have in 30 years if you invested just one penny today and doubled it every year? The answer will astound you: it is $10,737,418! Now, suppose you had to pay taxes of 31% on your investment? Over the same 30 years, you would have only $68,644. Obviously, no one can expect to double an investment every year for 30 years. Nonetheless, this example certainly illustrates the combined effects of compound interest and taxation.
Using a self directed IRA as an investment vehicle allows investors to benefit from the full power of compounding interest. This is due to the fact that investments made within a self directed IRA are tax-deferred, or in the case of the Roth IRA, tax-free. However, not all self directed IRA custodians are the same! See Why Equity Trust is the Preferred Choice.
The Effect of Taxes on Your Money
Let's look at a simple, real world example. If you were to contribute $4,000 a year to an IRA and assume an 8% rate of return for 30 years, your self directed IRA would be worth $449,133 at the end of year 30.
If you made the same investment in a non-tax sheltered environment, assuming a 31% tax rate, it would be worth $286,752 instead of $449,133. That is 43% less, a difference of $162,381 (as shown in the chart below).