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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 your IRA
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 can 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.
Will I have enough in retirement?
How much can be spent each year during retirement? See if your expectations match up with likely savings.
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.
When to withdraw? How much?
There's no single answer to when you should start taking money out, or how much you should withdraw every year (except for required minimum distributions, of course).
Your accounts, Social Security situation, life expectancy, and many other factors all play a role.
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.