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For savers and investors, there's one foundation for building wealth you may find useful: compound interest. Compounding applies not only to interest but also to investment gains. The earlier you invest, the greater the potential impact compounding can have on your total gains. Check out the power of compounding with the tool below, which assumes you'll invest $6,000 annually up to age 49, then $7,000 annually starting at age 50.
I'm 35 years old and I plan to retire at age 65
Total value at retirement is $488,290*
Select an annual rate of return. This rate will be used to estimate the future balance of an IRA. Actual rates of return cannot be predicted and will vary over time.
*Value based on $6,000 annual contribution to age 49, and $7,000 annually thereafter.2
You can see why it's so important to contribute early and often to a tax-friendly 401(k) or Individual Retirement Account (IRA), or both. An IRA is a tax-advantaged retirement account that you open and manage yourself. A 401(k) is offered through an employer.
How do I get going with a retirement investing plan?
All you need is a retirement account such as an IRA or 401(k), the ability to save, and an investing strategy.
Set up a retirement account
Tax-deferred compounding in a 401(k) or IRA is one of the most powerful advantages an investor can have.
An employer plan alone may not be enough. A Traditional or Roth IRA might be used to add to your retirement nest egg—or to start saving if a workplace option isn’t available to you.
Invest as much as you can, for as long as you can—at least up to your annual IRA or 401(k) limit, if possible.
Automatic, recurring transfers are a great way to make saving easy.
Having all of your assets, such as old 401(k)s and IRAs, under one roof may help make planning and investing for your future easier.
Looking for a good place to start?
We have tools that can help you put the pieces together and create a plan tailored to you.
What about taking money out of my 401(k) or IRA?
The rules for withdrawing money from your retirement accounts are complex, so check with a financial adviser about your specific situation.
Here are a few important guidelines.
Watch out for early withdrawal penalties
Generally, if you take money out of your 401(k) or IRA before you reach 59½ years of age, you'll owe taxes plus substantial penalties.
There are exceptions for certain expenses, including some medical and education costs.
How does Social Security fit in?
Social Security benefits are an important source of income for many Americans living in retirement.
How much you receive and when you get it will depend on a range of decisions you make, along with factors such as how long you worked and how you coordinate benefits with your spouse.
If you're retired, soon after you turn 72 (70½ if born before 7/1/49), you must begin withdrawing a minimum annual amount from your 401(k) and most IRAs.
These withdrawals are called required minimum distributions (RMD) and the penalties are severe if you don't make them.
Please note: Due to the CARES Act required minimum distributions (RMDs) are suspended for 2020.