“Learn—Maximum Time: 45 Minutes,” Personal Finances for Self-Reliance (2017), 184–93
“Learn—Maximum Time: 45 Minutes,” Personal Finances, 184–93
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Learn—Maximum Time: 45 Minutes
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Today’s Discussion:
4 Save and Invest for the Future
Read:In the previous chapter, we learned that investing is putting time, effort, or money into something and expecting some type of return. One of the reasons we may invest money is to have enough when we retire.
President Ezra Taft Benson taught, “As you move through life toward retirement and the decades which follow, we invite all … to plan frugally for the years following full-time employment” (Teachings of Presidents of the Church: Ezra Taft Benson [2014], 208). There may be government or social programs available to help you during retirement, but you will likely need to supplement the money available from these programs with your own savings or investments. If you fail to plan now, you may not have enough income or savings to be self-reliant after you retire.
Discuss:What will happen if you don’t have enough money to live comfortably during retirement?
1. Set a Retirement Goal
Read:Before you begin saving for retirement, it is helpful to estimate how much you will need. This simple formula can get you started:
You cannot predict exactly how long you will live, but you can predict when you would like to retire, and you can project how long you will likely live beyond that time. Around the world, most people retire between the ages of 60 and 70. You may live an additional 20 to 30 years after retiring.
Note: You may not need this full amount when you retire, as your investments can continue to grow through retirement, but considering this number is a good place to start.
2. Understand Compound Interest
Read:Compound interest can be one of the keys to having enough money for retirement. Compound interest is earning additional interest on interest, and it is typically represented as a percentage or rate of return. Once you earn your first interest payment, it is added to the principal balance. Then that larger balance continues to grow.
Read:Investing in ways that provide a good rate of return often helps people have enough money saved for retirement. Most people find it easier to invest smaller amounts of money consistently over time, such as a certain amount each month or from each paycheck, rather than large periodic sums. The example below demonstrates the total value of investing 100 per month for 30 years, with different rates of return. This is the power of compound interest.
Discuss:How can time and the rate of return affect the total value of an investment?
3. Understand the Relationship between Risk and Return
Read:As we have seen, the rate of return can be very powerful. It might seem pretty straightforward that all we would need to do, then, is to invest our money in something with the highest rate of return. But it isn’t that simple. As the following graphic shows, all investments carry a risk-and-return relationship. Typically, the lower the rate of return, the less risk that you will lose money on that investment. Conversely, the higher the potential return, the higher the potential risk that you will lose money.
Read:When considering potential investments, it is helpful to know some fundamentals. Almost all investments can be divided into two categories: those with a fixed rate of return and those with a variable rate of return.
A fixed rate means your rate won’t go up or down but remains constant or fixed. Examples of savings or investments with fixed rates include savings accounts, certificates of deposit (CDs), and bonds. Fixed-rate investments often have a lower rate of return and could be considered less risky than variable-rate investments.
A variable rate means that your return could go up or down, meaning you could make or lose money. Examples of variable-rate investments include stocks, many mutual funds, businesses, and real estate. Typically, variable-rate investments are considered riskier than fixed-rate investments, but they can also carry the potential for higher returns.
Diversification means spreading your money across multiple investments. Investing in multiple investments or multiple types of investments can help reduce your risk.
For more information on different types of investments, read the “Resources” section at the end of this chapter on your own this week.
Discuss:As a group, review the following concepts until everyone feels comfortable that they understand them.
Compound interest
Risk versus return
Fixed rate of return
Variable rate of return
Diversification
5. Research Potential Retirement Accounts
Read:You will typically have to pay some type of taxes on your investments. In fact, taxes can be one of the largest expenses to consider when investing. Fortunately, many governments allow retirement accounts that have special tax benefits you will want to understand. These investment accounts may be employer sponsored or individual, and within these accounts you can invest in stocks, bonds, mutual funds, and more. The accounts go by different names depending on where you live, but the basic tax advantages are similar and generally fall into two categories: tax deferred and tax free.
Tax deferred: Contributions to tax-deferred accounts are typically tax-deductible in the year of the contribution, while withdrawals during retirement are taxed at whatever tax rate your income puts you at at that time. If your investment is not likely to grow substantially, either due to a lower rate of return or because it has less time to grow, you may save more in taxes by deferring paying income taxes on that money until retirement, when the money may be taxed at a lower rate.
Tax free: Contributions to tax-free accounts provide no initial tax advantages. For these accounts, the money you contribute is taxed in the year it was earned. However, all future earnings and withdrawals are tax free. If your investment is likely to grow substantially, either due to a higher rate of return or because it has more time to grow, you would probably pay less in taxes using a tax-free account.
As you can see, based on the type of account you choose, you will either pay taxes up front or at withdrawal. Depending on your circumstances, one type may be more beneficial to you than the other.
6. Begin Saving for Retirement as Soon as Possible
Read:Once you have established an emergency fund and paid off your consumer debt, you should begin saving for retirement as soon as possible. The sooner you begin saving for retirement, the longer your money has to grow and the more money you are likely to have available for retirement.
One great way to begin saving for retirement is through an employer-sponsored retirement plan. If your employer offers some type of retirement account where they match some of what you contribute, take advantage of it! Their match is like a bonus or raise for you, just for contributing to your own savings.
The following activity helps to illustrate the power of investing regularly for a longer period of time.
Discuss Preparing for Retirement in Your Family Council
Read:During your family council this week, discuss your plans for retirement. Estimate how much you will need, when you would like to retire, and what your financial situation might be at that time. Write down the amount you would like to save, and determine an amount you can afford to set aside each month for retirement. Remember, while it is important to start saving for retirement as soon as possible, it is more urgent to build your emergency fund and to eliminate consumer debt first. During your discussion, you may want to use the “Sample Family Council Discussion” outline that follows.