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Some fraction of people love working; they love their jobs, their job gives them satisfaction and fulfillment, brings a challenge to their lives, and gives them the energy to get through life. Some are actors, some are financial counselors, some are teachers, or writers.
For the rest of us, we're working towards retirement. The ability to kick back and enjoy the savings we've built up through the years of employment, the ability to lounge around in the sun and enjoy life. To make your retirement happen, and to make it a comfortable retirement, you need to plan, and planning and saving early is better than trying to accumulate funds later. The benefits of early retirement planning allow you to accumulate these neccessary funds needed for your financial security during your retirement years.
Now, some cold hard facts
The first has to do with inflation. In 1980, a Big Mac cost a dollar, now it costs nearly two. This is known among economists (really) as the "cheeseburger metric" – the cost of a fast food cheeseburger will remain more or less constant in terms of inflation-adjusted income, because of market pressures keeping the cost of food more or less stable.
What this means is that a dollar in the future will have less purchasing power than a dollar now does, so you'll need more of them to plan for your retirement. In general, the real US inflation rate hovers right around 3 to 4% per year, and this means the purchasing power of the dollar roughly halves every 18 to 25 years. Keep this in mind when planning for your retirement – if you're living comfortably on $30,000 a year now, and plan to retire in 25 years, you'll need to have a general retirement income of about $60,000 a year to maintain your current standard of living (the actual value you'll need will likely be less, because the house and car will be paid off…on the other hand, your standard of living will probably have risen before then as well.)
Paying for your retirement means stashing money away; the best way to do this is to stash it away in a company matched 401(k) program. Here's how it works – up to a certain percentage of your salary, for every dollar you put in, your employer will match it; on top of that, the contribution and the matching funds are tax deferred – they don't count against your income now for income tax purposes. What this effectively means is that you're getting roughly 130% interest on the money the moment it hits your 401(k) account.
But, as the saying on late night television says, "that's not all…". Any interest your investments earn is also tax deferred, which means your nest egg grows larger, faster. In effect, this is avoiding a 33% penalty on interest income from your investments. The sooner you start contributing to your 401(k), the sooner the miracle of compound interest will start working in your favor. (A handy rule of thumb – 72 divided by the rate of interest in percentage points gives the number of years before compound interest will double your initial investment. This is why the employer matching part of a 401(k) program is so important – it gives you a significant head start on building your retirement portfolio.
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