Financial TipsAlan S. Moore / L’Observateur / July 21, 1999You combine the birthdays of your kids, your Social Security number and your house number and somehow come up with the winning lottery numbers. Congratulations!Now wake up to reality. The odds of winning a lottery and thereby securingyour financial future are very low indeed. The smarter strategy is to startputting aside money on a systematic basis now for your retirement, no matter what your age. An Individual Retirement Account (IRA) is anexcellent way to do this.
Published 12:00 am Wednesday, July 21, 1999
IRAs Take Advantage Of Compounding
An IRA isn’t like playing the lottery – you don’t need luck to build up your IRA balance, just discipline. If you make consistent contributions overyour entire working career, and invest wisely, you may enjoy a substantial retirement nest egg.
An IRA is an excellent way to take advantage of time and compound interest. Let’s say you’re 25 years old and contribute the maximum $2,000to your IRA every year (40 years!) until you retire at age 65. Assuming an8 percent average annual rate of return compounding annually (your actual return will differ), you would have $518,113 in your account when you’re ready to retire. Waiting until you are older to begin contributing could beexpensive in the long run. If you don’t begin contributing until 20 yearsbefore you retire, at age 45, you would have only $91,524 in your IRA at retirement, assuming the same 8 percent average annual return compounding annually.
Tax Advantages Of IRAs
If you really win the lottery, Uncle Sam is entitled to his share of your winnings taxed as ordinary income. If you subsequently invest your lotteryproceeds, any taxable investment earnings and realized capital gains will also be taxable each year. The beauty of an IRA is that investmentearnings and capital gains are tax-deferred until you begin taking distributions, typically at retirement, when your tax bracket may be lower. And, if you qualify, your contributions to a traditional IRA may betax deductible. If you are eligible to set up a Roth IRA, qualifieddistributions taken after five years may be made free of federal income taxes and penalties.
Winning IRA Strategy
Winning the lottery takes a great deal of luck. Accumulating an impressiveamount of money in your IRA takes planning, persistence, and patience.
A winning IRA strategy involves: making the maximum investment you can, starting early in your working career, and investing faithfully every year.
If you follow these simple rules, you won’t have to trust your retirement nest egg to chance. For more information, consult your financial advisortoday.
(Alan S. Moore is a financial advisor of Legg Mason Wood Walker, Inc., adiversified securities brokerage and financial services firm that is a member of the New York Stock Exchange, Inc. and SIPC.)
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