Even as you save for shorter-term goals, it’s important to keep saving for retirement. If you waited until you had no other goals to save for before beginning to save for retirement, you would, most likely, never get around to it. Even as shorter-term goals come and go, making steady, even if modest contributions to your retirement goal is the key to achieving it.
A savings account is good for shorter-term goals, but for retirement, you should contribute to an account designed specifically for that purpose. Not only is it more likely to give you a greater rate of return over time, it offers certain tax advantages, as well.
No investment is without risk, but there are ways to manage the risk. If you’re investing for a long-term goal, such as retirement, the greater risk may be placing your money in an account, such as savings, that doesn’t earn enough over time. Although a traditional retirement account may lose value during any given short term, in the long term, the gains are much more likely to outweigh the losses.
The Thrift Savings Plan is a retirement plan available to service members and other U.S. federal government employees and functions much as employer-based 401k plans in the private sector. It allows you to choose from among five different funds with differing levels of risk and potential return. As of 2010, you can contribute up to $16,500 a year tax-deferred.
The surest way to have more money for retirement is to begin saving as soon as possible. Starting early gives your money more time to compound over time. Compounding allows you to not only earn interest on the money you contribute, but on the interest you’ve already earned, as well. The result is a much higher return on your initial investment than you might think.
Look at the case of Charlie and George who both contribute $150 per month toward retirement . Charlie starts saving at age 19, and continues for 10 years until age 29. George starts when he’s 29, and saves for the next 37 years, to age 65. Surprisingly, Charlie actually ends up with more money than George, even though he contributes much less. That’s the power of compound interest over time! (Assuming an average return of 8%.)