The average American could retire with a million dollars in retirement funds.  The average American could retire with more than enough money to live well, afford great medical care and leave a small fortune to their children or favorite charitable organization.  The average American could; but the unfortunate sad reality is that the average American won't. 

Except you.  Because you are choosing to be in control of your finances rather than let your finances happen to you.  And you have a plan.

In this step you need to begin investing for retirement.  You need to put 10 to 15 percent of your annual income into a 401k or IRA in good mutual funds.  There are several types of retirement programs depending on your employer.  There are Roth IRA's and Roth 401k's, and regular IRA's and 401k's.  Regardless of the name, you need to become an informed consumer so that you have a basic understanding about the different types of investment options. 

Here is a quick summary:

Investment Type Description

Roth 401k's & Roth IRA's

Money put into Roth investments comes out of your paycheck after taxes, grows tax free in your investments and after 59 and 1/2 you can withdraw the money without paying any more taxes.

Regular 401k's & IRA's

Money put into these investments come out of your paycheck before you pay taxes, grow tax free but when you take the money out after 59 and 1/2 you will pay taxes on the money.  This type of investment is known as tax deferred because the taxes are delayed until the funds are withdrawn in retirement.

Mutual Funds & non-retirement accounts

Non-retirement accounts, including saving, checking, money market and mutual fund accounts are all funded from after tax dollars. This means that taxes were taken out of the money before you were able to use it for investment purposes.  The growth or interest earned on these accounts is taxable.  Additionally, the funds in the accounts can typically be accessed at almost any time.

 

All of these options may begin to seem overwhelming and dizzying… so let me boil it down for you with an example.

John Doe wants to invest 15% of his annual income which is $40,000 dollars per year.  This comes out to 6,000 dollars per year or $500 per month.  He looks at the following questions to determine how to invest the money.

1) Does your company match a portion of your retirement savings?  And how much?  His company provides a match up to 5%.

2) Does your company offer a Roth 401k? 

Let's look at what his investment choices should be.  The company provides a match, so John would invest 5% to get the company match.  He wanted to invest 15% total, so John will invest the remaining 10% into the Roth 401k.  There is a cap on the amount that can be invested in a Roth account each year.  If he hits that amount then he will invest any remaining amount in the regular 401k.

 

Remember that you need to have a total of 10 to 15% of your gross income going into retirement accounts.  Let's take a look at how much money this will turn into by retirement based on a few assumptions.  The stock market averages 12% a year.  Some years it the rate is more and some years the rate of return is less.  For purposes of our example we will assume 12% as an average rate of return.  Additionally, we will assume that retirement age is 70.  Check out the results.

Age Years until retirement Total available at retirement
30 40 $5,882,386
40 30 $1,747,482
50 20 $494,628
60 10 $115,019

As you can see, the more time you have until retirement, the longer your money has to grow.  Are you excited by these numbers?  What would it feel like to have 5 million dollars when you retire?  How about 2 million?  I hope that each of you reading this are beginning to realize that you have the ability and the power to change your future.  Not only for you but also for your children and their children. 

Now, some of you may find these numbers depressing.  You may be approaching 50 or 60 and don't have anywhere near the money you want to have saved.  I would still encourage you to take the steps that I have outlined over the past week.  You can get out of debt and still retire with style.  You may not have a million dollars put back and you may not be able to travel the world year round, but you can still live debt free and live comfortably in retirement.  Please make the change.  It's never too late to change!

Will you retire a millionaire… or a pauper?  It's your choice.  What will you do?