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Early investing, compounding key to a good retirement

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A new report from Ameriprise Financial finds people in San Diego are doing a better job of planning for their retirement than most other major metropolitan areas.

San Diego ranks No. 3 on the survey of 30 regions when it comes to retirement confidence. Why the optimism?

“Preparation may be the key," according to the report. "The number of people who say they’ve determined the amount of income needed in retirement — 35 percent — and the amount they need to save for retirement — 26 percent — are both higher than the national average.”

To be sure, there is no subject more studied than the preparedness, or lack of preparedness, for retirement. And most of the studies paint a rather gloomy picture.

For instance, a new survey from Yahoo Finance finds “the declining economy and perceptions of the misuse of government power have caused many to lose hope in the American Dream.” Yahoo says 37 percent of adults have no retirement savings, and 38 percent assume they will have to live off of nothing but Social Security benefits.

The real problem is that most people postpone retirement savings until a time when it becomes too late to benefit from what Albert Einstein called the “eighth wonder of the world”: compounding.

Let’s compare a couple of scenarios. First, consider a person who begins investing $2,000 a year at the age of 25 and earns an average annual return of 8 percent. By the time that person reaches the age of 65, the nest egg will have grown to $585,000.

However, waiting to begin the same saving and investing program until 45 will result in a much less comfortable lump sum of just $98,800. Delay until 55 and your portfolio value will be just $30,700.

In other words, it’s time, not timing, that makes for successful investing.

While winning the lottery or inheriting a fortune might be options, it really does come down to developing the discipline to save and invest as early as possible.

No better tool is available than an employer-sponsored retirement savings program like a 401(k). No other plan offers free money, assuming your employer matches a part of your regular retirement contributions.

Of course, you don’t need a retirement account to save for retirement. Simply setting up an investment plan on your own or investing through mutual funds can accomplish the same long-term growth benefits.

And, like a 401(k), mutual fund companies will let you put your investments on automatic pilot. Investors can authorize a fund to make systematic withdrawals from bank accounts each month and immediately invest those dollars into the funds you choose.

This will allow you to take advantage of dollar-cost-averaging as well as the reinvestment of any dividends or capital gains generated by the investment.

Bottom line, investing is incredibly easy and efficient. And the true power of compounding shows through when you jump-start the process at an early age.

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