How Different Retirement Scenarios Compare

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How Different Retirement Scenarios Compare

Just how much can tax deferral help your retirement money grow?

This chart shows you a comparison of three investment options: an after-tax, taxable investment, like a passbook savings account; an after-tax, tax-deferred vehicle, such as an annuity; and a pre-tax, tax-deferred plan, such as a 401(k) plan. As you can see, lessening the tax bite creates considerable extra capital for retirement.

Something impressive happens when, instead of leaving a pre-determined amount of money to grow over time, you continue adding to it. The chart below shows the effect of investing just under $5,000 per year ($416 invested at the beginning of each month) into a pre-tax, tax-deferred account beginning at various ages. The example uses a 6% interest rate, which is not always typical. A growth rate this high is possible but by no means guaranteed, for retirement plans that invest in stocks or mutual funds. The earlier you begin investing, the more rapidly your funds will grow, because time and compounding of interest can make your investment base grow substantially.

Don’t forget to consider the risks of investing before you start.

Earnings rates will vary, and may be negative. Actual results may differ substantially from those shown. Past performance does not guarantee future results.

By beginning your yearly investing at 25 instead of waiting until you’re 35, you could potentially increase your retirement wealth to $832,602. Not bad for a little sacrifice in your early years out of college!

As you can see from these illustrations, early and frequent investing along with tax advantages can prepare you financially for your later years, when you may not have the benefit of working. As the life expectancies of retirees continue to grow, their retirement income needs grow, too. Taking advantage of these tax-deferred investments makes it easier to meet one’s retirement goals.