You want to be smart about growing your retirement account in a healthy way. Most people don’t realize how many different ways there are to save towards retirement using one or more different types of retirement accounts. As you begin researching which account(s) is best for you, it’s important to understand that growing your retirement account is more about how much your account earns than it is about how much you put into savings.
People are shy about discussing their personal finances and even shyer about talking about their retirement savings. But the personal experience of people you trust can help you answer some very important questions about how to grow your retirement account. When it comes to increasing value, you’ll find people who use time as a tool for growth tend to do much better than those who procrastinate about getting started.
Starting earlier requires you to invest less of your own hard-earned cash by compounding your savings. Starting later has two big disadvantages. You have to invest more cash but have less money when the time arrives to retire.
Your goal is making your money work towards your retirement rather than you working for your retirement money!
Growing Your Retirement Account by Taking All of the Money
First of all, don’t leave any free money on the table. Make sure you are taking all of your employer’s contribution towards your retirement account. Pensions usually grow without you making financial contributions but 401k accounts depend on you making contributions.
If your employer offers to match 8% of your salary, make sure you are contributing the full 8%. This is an instant doubling in value of your investment. It is all tax-deferred money that will compound for many years to come. If your employer offers 8% matching but you are only contributing 4%, you’ve cut your opportunity in half.
But do read the fine print of the governing documents for your employer matched account. There are rare scenarios when high fee investment options and high administrative costs make investing in these accounts unadvisable. Also, know that your employer contributions don’t count towards your annual 401k contribution limits. You may be able to fund additional retirement accounts not controlled by your employer.
Decades of Tax-Deferred and Compound Interest Growth
The two most common types of retirement accounts are Individual Retirement Arrangement (IRA) and 401(k) accounts. However, some people choose to keep all of their money in a savings account. A savings account has many disadvantages compared to a formal retirement account. A big one is that savings accounts don’t offer any tax breaks. Another is that you actually pay additional taxes on any interest (however small) earned from a savings account. The one advantage that some people perceive is that the savings is easier to get at than from a retirement account. That’s a minor advantage considering the Solo 401k loan.
While savings accounts do offer compound interest, tax-deferred money in a retirement account that compounds is more attractive. Compounding tax-deferred money is a much more effective way of growing your retirement account. This is much preferred to handing over taxable interest on savings to the IRS.
The Rule of 72
Albert Einstein is credited with saying, “compounding interest is the most powerful force in the universe.” The principle of compound interest is simple but important for growing your retirement account. It simply means that all interest earned is added to the principle of your account and the interest earns additional interest going forward.
There is something known as the Rule of 72 that quickly estimates how fast your money doubles by compounding the interest. You divide the number 72 by the annual interest rate. This works well as long as the interest rate is less than 20%. If you’re earning 2% interest, an account with $2,000 grows to $4,000 in 36 years (72÷2). That’s a long time to make a couple thousand bucks. And you pay tax on that interest.
You could do much better if instead of first paying 21% tax on the money, you start before taxes with $2,420. Your account would then double to $4,840.
Although the rule is not always exact, it usually works as long as the interest rate is less than 20%. If your investment percentage is not guaranteed, you can run your own numbers (including adding more contributions) using this simple compound interest calculator.
But let’s take the most important step to growing your retirement account. Do this by not only compounding your interest but also including earnings. Then, you can add by investing your retirement account so that it generates substantially more than 2% interest.
Decades of Tax-Deferred and Compound Interest PLUS Earnings Growth
Here is where you gain the potential to make the biggest difference for growing your retirement account. This is how you truly make your money work for your retirement rather than you working for your retirement.
You can take full control of your retirement account to invest it in ways that earn much more than 2% through a savings account. You can invest in rental real estate that can earn 12% profit (or more) each year and appreciates in value. Using a Solo 401k or checkbook IRA, you have an unlimited number of tax-deferred ways to generate income and/or invest in assets that appreciate in value. The possibilities for growing your retirement account extend way beyond compound interest. You can:
- Earn rental income + appreciated value and then sell tax-deferred to invest in another property earning even higher income.
- Save the earned income in a compounding interest account.
- Alternatively, use it to invest in another income generating investment (or some of both).
- Invest some or all of your retirement account in something with a very high earnings potential like cryptocurrencies (bitcoin).
- You can invest in tax liens earning as much as 15% per year.
- Choose a private placement such as private business, hedge fund, or investment company with very handsome returns.
- Growing your retirement account with a Solo 401k is all about freedom to move your money about as you please.
Grow Your Retirement Account Faster
If you are serious about growing your retirement account to the maximum, you need to take full control of your financial future. Your possibilities are so great that a single calculator cannot calculate all of the possibilities. What you can do is use this versatile calculator to consider what a Solo 401k can do for your retirement future.
Have questions about growing your retirement account? The 401k experts at Nabers Group will help you get your retirement funds into your control, where they belong.