However, it is still possible to do even better. The historical average annual return for the S&P 500, adjusted for inflation, is around 7%. If you were to invest $100 every year in an index fund that mirrors the S&P 500 through your retirement account, you would have $1,433.48 at the end of the 10-year period.
Effect of Inflation Inflation is another reason why you need to start investing now. Measured in terms of the Consumer Price Index (CPI), inflation chips away at the actual value of your money. Every year, retailers, business owners and just about everybody else raises prices of goods and services to account for higher costs. For example, assuming 2% inflation, if you were to leave $1,000 in a checking account that gains no interest, your deposit would be worth $903.92 in five years and $817.07 in 10 years. To maximize your purchasing power in the future, you need to start investing now.
List of Benefits From Retirement Accounts Investing in retirement accounts, including 401(k)s and traditional IRAs, allows you to boost your investment by deferring applicable income taxes until retirement, when you are more likely to be in a lower tax bracket. By contributing to your retirement account on a pretax basis every year, you effectively reduce your taxable income. For example, if you were to contribute $100 out of your $2,000 bi-weekly paycheck to an employer-sponsored 401(k), you would only pay federal income taxes on $1,900. When you are close to the upper limit of your tax bracket, contributing to a retirement account prevents you from paying more taxes. Another benefit of contributing to a retirement account now instead of in 10 years is you are taking advantage of your annual contribution limit. In 2015 and 2016, you could contribute up to $18,000, or $24,000 if age 50 and over, to your 401(k) plan each year. If you do not contribute at least $100 each year, that chance is gone forever. And so are the potential returns that could have accumulated until you retire.
The Bottom Line It is better to start saving now, even at a small rate, than just trying to catch up later. Even an annual contribution of $100 to your savings account, investment account or retirement account improves your odds of reaching your investment goals. Original article found on Investopedia
Published on Feb 12, 2016