Part 3: Saving for Retirement
#Understand compound interest. Compound interest is a way to save money and have your savings work hard for you over the course of your working career. Compound interest is earned by most bank accounts and other investment accounts, such as ASNB and EPF. Specifically, compound interest refers to a situation where interest is earned on the principal (initial investment) plus interest earned up to that point. This allows it to build value faster than simple interest, in which interest is only earned on the principal.<ref>Ref</ref>
- For example, you can put away RM1,000 per year for 30 years at 10% interest and have a nest egg of close to RM200,000. You actually earned RM170,000 on an investment of only RM30,000. This is all due to the power of compounded interest.
- Furthermore, if you put that RM30,000 in all at once in the beginning of the 30-year period, your total would instead be about RM525,000.
Unfortunately, retiring is getting harder and harder, with more expensive medical insurance and the possibility that social security will not exist or be severely watered-down. Many hard working people are forced to save as much as possible for the golden years to sidestep the possible hardship they may face. Whether you are 50 or 22, the best thing you can do is to start planning as early as possible for your retirement.#Calculate how much you need to save each month. Search online for a compound interest calculator with the option to add a monthly or annual contribution. Input a reasonable interest for the type of investment account you plan to use and how many years you have until retirement as the time limit. Then, play around with the initial deposit and monthly contributions until you reach your goal for retirement.
- For example, make your initial deposit the amount of money you currently have to put into retirement and start with an initial monthly deposit of a small amount (RM50 or RM100). Work up the monthly deposit amount until you reach your goal.
- You may find that you don't need to deposit much. A 25-year old that starts with RM10,000 and deposits RM100 per month until retirement at 65 will have over RM550,000 by retirement.<ref>Ref</ref>
- The interest rate that you use will depend on the nature of your investment account. However, for preliminary purposes use 8 percent. This number represents the average return you can expect from a diversified securities portfolio over time.<ref>Ref</ref>
#Create a saving plan. Based on the monthly amount that you need to save, create a monthly budget that takes this amount into account. Even if you can't afford the full amount now, set aside what you can and put it into your retirement account. The important thing is to stick to your plan over the years until retirement, when it will all be worth it.<ref>Ref</ref>
- Saving some now for retirement can make it easier to save more later. That is, the act of setting aside even $50 per month now can make it easier for you to remember and have the ability to put in RM300 per month when you can afford it.<ref>Ref</ref>
#Increase your savings if you can. Over time, you will advance in your career and pay off debts that you currently have. You can then contribute this additional money to your retirement account. Remember, there is no harm in contributing money above the amount that you originally calculated. Most people end up contributing the most to retirement in their fifties and early sixties, as other expenses are reduced.
- An easy way to shift money into your retirement account to contribute more when your children leave home. After they have started supporting themselves, take the money you were spending to support them and put it into retirement. This way, you won't even notice the increase in savings (except in your account balance).<ref>Ref</ref>
#Don't touch your money until you retire. It may be tempting to reach into your retirement account for large purchases as the balance grows. However, any money you take out is money you can't have later and only reduces the amount of interest you can earn. In addition, any money taken out of the account is taxed as income as your standard tax bracket rate. Those under age 59.5 will also have to pay an additional 10 percent penalty on the withdrawal.
- You can prevent having to use this account for emergency expenses by keeping an emergency account that contains at least six months' worth of living expenses.
- You can prevent paying taxes on your retirement account when you switch jobs by rolling over the balance into a retirement account with your new employer.<ref>Ref</ref>
Credit: www.wikihow.com
